Analysts and Shareholders Unhappy with Macrovision/Gemstar Deal

Shares of both Macrovision (MVSN) and Gemstar-TV Guide (GMST) have extended their losses in the wake of their extremely poorly received announcement of plans to merger the two companies.

The Street simply hates this deal. Gemstar holders think they are being ripped off. Macrovision holders are in a panic about the lack of obvious financial synergies in the deal, and the increased level of risk. (The company is taking on $800 million in new debt to finance the deal, for instance.) Risk arbs seem concerned that the deal can’t be completed given the sharp post-announcement slide in the shares of both stocks.

There were a flurry of research notes on the deal this morning, and they were mostly downbeat on the two stocks. Here’s a roundup:

• Kaufman Bros. analyst Todd Mitchell cut his rating on GMST to Hold from Buy; his price target goes to $6 from $8. “We think this deal is ill-conceived, and we recommend shareholders reject it as it is proposed.” On the other hand, he thinks holders have over-reacted, and that selling now “is a mistake.” He complains that the deal offer effectively no takeover premium to GMST holders, and he says that the structure of the cash/stock mix in the deal failed to protect GMST share from the deflation of MVSN’s stock price. He also wants to know is News Corp. (NWS), which has a 41% stake in GMST, is going to take cash or stock for its shares.
• Goldman Sachs’ Sasa Zorovic today cut his price target on Macrovision to $27 from $30. He says the proposed deal “significantly increases the risk profile of the investment in Macrovision.” Zorovic adds that the deal appears to be 10%-15% dilutive to MVSN holders, and says “top-line synergies are likely to remain limited.”
• Deutsche Bank’s Brian Thackray chopped his target on Macrovision today to $23 from $37. “We are not clear on why the company felt it needed to make this transaction now and expect it to be an overhang for a while if the deal goes through.” He adds that given the reaction of the stock, and conversations with holders, there is a risk the deal is rejected by MVSN holders. (The deal needs 51% approval by MVSN holders, and 67% from GMST holders.)
• Natixis Bleichroeder’s Alan Gould today dropped coverage of Gemstar. “We assume the large logical strategic buyers - Google, Microsoft, Comcast, Cisco, etc. - all looked at the deal and decided to pass,” he wrote. “We surmise that the 41% shareholder, News Corp., agreed to vote in favor of the deal because it was the best/only deal offered.” Gould says the backing from News Corp. makes it likely GMST will win backing from its shareholders, but he says that “the bigger question” is whether MVSN will get holder support for the deal.
• Maxim Group’s Mark Harding downgraded Macrovision today to Hold from Buy, citing concerns about both dilution and the $800 million in debt the company is taking on to do the deal.
• Jefferies & Co.’s Ross MacMillan cut his target on MVSN to $23 from $28, and repeated his Hold rating. He thinks the deal would be 30%-plus dilutive to MVSN’s earnings.
• Morgan Joseph’s David Kestenbaum actually upgraded GMST today to Buy from Hold. He notes the wide arb spread on the deal, and contends the stock is worth $5.95 a share on a sum-of-the-parts basis. He contends that if the deal closes, MVSN is likely to sell off both TV Guide magazine and the TV Guide Channel.

Monday morning, Macrovision shares are down 97 cents, or 4.75%, to $19.47, while Gemstar shares are down 30 cents, or 6%, to $4.69. Since the deal was announced, Macrovision shares are down 25%, and Gemstar shares are off 22%.