Playboy Buyout Talk, Difficult Valuations (PLA)

Playboy Enterprises Inc. (NYSE: PLA) is sitting in a tough spot.  This morning there is a report that the company has the bunny franchise up for sale.  We have looked at this very notion in the past with too many issues over its valuation long before the media and market meltdown took this down to new lows.  There are some issues here which go much deeper than the notion of showing too much skin.

The New York Post from “Media Ink” noting Heff and friends are looking for some $300 million.  It is interesting the reason for the price, which was listed as lifestyle maintenance for Heff.

Regardless of what Heff needs, our own calculations put the Playboy empire being worth far less than this sum of $300 million.  After a 5% gain today, the market cap on the stock is a mere $89 million based upon a $2.68 share price.  It is actually rather easy to make the argument that in a normal economy that the franchise is worth more than today’s price.  But this $300 million seems absurd on a standalone basis.

We panned Playboy about a year long before the market meltdown and before the advertising meltdown with the notion that this stock was headed far lower than its $7.00 share price for our newsletter.  We noted that AdultVest as one group among several that could possibly arrange an acquisition, but said it would have to be at far lower prices.  This recently hit around the $1.00 mark before the latest recovery.

The serious business issues exists still, and maybe even worse, than was the case a year ago.  You do not have to buy what Playboy sells anymore.  Playboy has worse issues than falling ad sales in this manner.  The only “cheap” notion about the stock is the thought that it was $7.00+ over a year ago, and it traded between $10 and $15 for most of the period from two to five years ago.

The company’s losses are widening out, and the revenues are still contracting.  Its first quarter revenues recently released were down $16.9 million year over year to $61.6 million. Cost-cutting measures were said to offset all but $1.4 million of the nearly $17 million revenue decline and led to improved margins in the TV and digital businesses, despite a lower revenue base.

The company noted that it is focused on capitalizing on the growth potential of digital and licensing operations and has a revamped free site that it believes is more attractive to both consumers and advertisers.  Despite a tough economy, its goal after cost cuts is improving margins and higher profits in the digital business by year end.  On the consumer products arena, the company said it is seeing a flattening out in the downward sales trends, and even noted an expectation of year over year revenue and profit growth in the second half of the year.  It also noted that the second entertainment venue will likely come on-line before the end of 2009 rather than in early 2010.  Playboy even noted that the publishing business, still a significant focus, the company is targeting a better bottom line in 2009 for the magazine.

Here were the segment results for Q1 compared to the same period last year:

• Revenues in the Entertainment segment were down 20% to $26.2 million, which is supposed to be from a stronger dollar and from an asset sale.  In that arena, 2009 domestic TV revenues fell to $13.3 million from $16.5 million, and noted that modest growth in video on demand was more than offset by the loss of revenues related to the studio sale and lower pay-per-view revenues.
• Print/Digital Group reported a first quarter 2009 segment loss of $3.6 million, $0.8 million worse than the same period last year, and the outsourcing of e-commerce was the largest factor in the group’s 26% decline in revenues to $26.1 million during the same time period.  Playboy magazine revenues were down 16% to $13.5 million on circulation and ad sales.  Playboy a 39% decline in Playboy magazine advertising revenues in the 2009 second quarter compared to last year.
• The company’s Licensing Group income was down $1.1 million to $5.6 million compared to last year as revenues fell by $1.2 million to $9.3 million.

Buying when the business is bottoming out is obviously when any investor would want to get in.  That fits in over and over with our “Less-Bad” thesis.  There is a serious problem here though.  The company’s turnaround is far from secure. Playboy still has no permanent CEO.  It is just as easy to make the argument that the business will continue sliding lower and lower as it is to argue that things are bottoming out.  Free competition for eyeballs and relevance could keep eating away at the company even if the economy turned sharply into recovery.

Playboy may have also missed the chance to re-brand itself to deal with the flood of the free porn and free adult-oriented entertainment on the web.  Its radical changes of lower frequency and higher quality is not yet determined, and that outcome has too many moving parts to be on yet for any “sure thing buyout” investors.

Alexa gives Playboy’s website a rank of #1,401 overall and #701 in the United Sates.  There are many companies that are far newer that are ranked far higher on Alexa, and it looks like their are 8 of the top 100 sites inside the U.S. that are obvious adult-oriented in the rankings.

As we have noted, it is probably far more fun to attend one of the Playboy parties than it is to own their stock.  That has been the case so far for anyone other than those who bought the stock over the last 3 months.

We do not have the most recent balance sheet yet from the full SEC quarterly filing, so we have incomplete data there.  But Playboy’s liquid assets are dwindling, and even its goodwill and intangible asset values are lower than in prior years.  The total liabilities have contracted, but nowhere near the same rate as the assets.  Its balance sheet is inverted on the notion of net tangible assets, even if it still lists positive shareholder equity.

Our biggest concern over the company’s hopes of a much higher valuation and its ability to have unlimited upside is the company’s business history.  That is the case even without considering the contraction of the last year.  Revenues fell to $292.147 million in 2008 from $339.840 million in 2007.  Revenues were $331.142 million in 2006, were $338.153 million in 2005, were $329.376 million in 2004 and were $315.844 million in 2003.

For Playboy to be worth more, its revenues are going to have to either stabilize firmly or will need to improve.  The good news is that $89 million in value (market cap) today leaves a lot of room for upside regardless of the notion of where the stock traded in the past.  Cutting costs and outsourcing could work even if it is based upon shrinking revenues continuing.  But even throughout most of the 2000’s decade so far, the revenues never showed any solid gains and the net take was far lower than anything to justify a $300 million price tag based on most simple private equity or conservative buyout models.  If this was a steady earner that was not in the troubled publishing business and was not “a victim of free” in the model, then the argument of a 10-times earnings number might (only might) justify somewhere around those levels if the company could run at net profit margins close to 10%.  Those numbers are not the case today and were not the case in recent years.

We are leaving you with a financial no-man’s land picture because the values here are going to differ wildly from person to person.  We can easily make the argument that Playboy’s value as a franchise could be revitalized with a new partner and new capital infusion, and that could be much higher than the $89 million of today.  But getting anywhere close to the notion that this business is worth $300 million again is a notion we do not share today.

JON C. OGG
MAY 22, 2009