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Macrovision Buys Gemstar for $2.8B - Broadcasting & Cable

Macrovision Buys Gemstar for $2.8B

Shares tank at both companies following bid for TV Guide giant
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Macrovision, a provider of digital protection technology, is set to acquire television program guide provider Gemstar-TV Guide in a cash and stock deal valued at around $2.8 billion.

Twenty-five-year old Macrovision, based in Santa Clara, Calif., is best known for content protection and security technology for the motion picture industry, home entertainment distribution and online.

Combining with Gemstar-TV Guide's content guidance services will allow the company to offer commercial and personal libraries of protected content to be accessible across platforms through interactive guides.

The acquisitive company has recently scooped up technology firms and assets to complement its portfolio of products, including All Media Guide, Mediabolic and Blu-ray disc security technology from Cryptography Research.

Seven-year-old Gemstar-TV Guide, a provider of interactive programming guides and publisher of TV Guide magazine, weathered major lawsuits in recent years during an inflated revenue scandal that led to the ouster of former CEO Henry Yuen.

The Securities and Exchange Commission ordered Yuen to pay $22 million for his role in the company's overstatement of revenues by at least $248 million, spanning the period from June 1999 through September 2002. Yuen was also barred permanently from heading another company.

On a conference call, Macrovision CFO James Budge said that based on the combined companies' current businesses, they expect to achieve double-digit revenue growth of between 10% and 15% over the next five years.

NOT WORRIED ABOUT HEAVY DEBT

Budge also tried to assuage any concerns over increasing debt to finance the transaction.

“We are adding a sizable amount of debt to our balance sheet,” he said on the call. “However, we believe purely on an operating cash flow repayment model we will have ample capacity to service the debt and reduce it to zero as early as 2011 without requiring the sale of any particular asset.”

Under the terms of the deal, Gemstar-TV Guide shareholders will have the right to convert each share for either $6.35 in cash or 0.2548 of a share of common stock in a new company that will hold both Gemstar-TV Guide and Macrovision. The aggregate cash consideration to Gemstar-TV Guide shareholders will not exceed approximately $1.55 billion and will be funded by cash on hand and the issuance of $800 million in debt.

At the close of the deal Macrovision stockholders will own 53% of the new company while former Gemstar-TV Guide stockholders will own 47%. The deal, subject to shareholder approval by both companies, is expected to close in the second quarter of 2008.

The deal represents a 6% premium over Gemstar-TV Guide's Thursday closing price and a 24.5% premium over the price before the company made its July 9 announcement that it was seeking strategic alternatives.

Shares of both companies plummeted Friday on the news. Gemstar-TV Guide was down as much as $1.58, or 26%, from Thursday's close of $5.98 in trading Friday morning. Macrovision stock dropped as much as $7.39, or 28%, from its $25.99 close Thursday.

“Clearly the take-out price at $6.35 is a disappointment,” says Janco Partners analyst April Horace, who believes Gemstar-TV Guide is worth $7.10 on a standalone basis. Horace added that she didn't think the synergies of the combination were clearly demonstrated to investors by the companies during their conference call outlining the deal.

The new company will be headed by Macrovision president and CEO Fred Amoroso. Macrovision's CFO Budge will assume the same role at the combined entity. Both Gemstar-TV Guide CEO Rich Battista and CFO Bedi Singh will leave the organization at the close of the deal.

The new company's board will include four members selected by Macrovision and three by Gemstar-TV Guide.

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