New Frontier Media: Hot Or Not?

| About: New Frontier (NOOF)
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New Frontier Media (NASDAQ: NOOF) is attracting some attention lately… but not for its steamy pay-per-view movies or its habitual 5-year unprofitability. The movie distributor has signed a definitive merger agreement with Larry Flynt's LFP Broadcasting LLC, a private company known for publishing Hustler Magazine. And Larry Flynt wasn't the only interested party either. Rumor has it Manwin Holding, owner of Playboy, was also interested in acquiring New Frontier Media. But despite allegations and continued underperformance over the past five years, these recent developments are now seeing New Frontier Media up 53.85% on the stock exchange as at October 16, 2012.

Larry Flynt acquired New Frontier Media for US$33 million. Not a bad price at all, considering New Frontier lost US$3.5 million during the 2012 fiscal year on revenue of US$41 million. Not to mention, that due to free streaming and illegal Internet downloads the company has lost almost 80% of its value over the past year, including close to US$50 million in sales from 2011 alone. However, the acquisition is not as clear-cut as it may seem. The merger agreement only entitled shareholders to US$2.02 per share with the option to receive an additional US$0.06 per share under specific circumstances relating to the company's cash balance. Analysts estimated the value of each share to be closer to US$4.00, resulting in an investigation and lawsuit by Willie Briscoe, former US SEC attorney. And it doesn't end there. Former CEO Michael Weiner, fired for suspicion that he was involved in unsolicited buyout offers with Longkloof Ltd., is suing New Frontier for unfair dismissal. If Weiner wins, New Frontier could be up for a payout for unlawful dismissal. No doubt Flynt is crossing his fingers here, given New Frontier's annual revenue is sitting at an average of just US$42.03 million per year, and the company is running with a profit margin of -9.19%.

Given that New Frontier Media aren't in the greatest financial shape, one may wonder what interest Larry Flynt or LFP Broadcasting LLC has in acquiring a company that appears to be running itself into the ground. Especially considering Flynt's empire includes a number of television stations already. LFP President Michael Klein told Business Insider that New Frontier Media was an opportunity for LFP to strengthen their portfolio and growth opportunities. Not to mention, this acquisition makes Larry Flynt one of the biggest business owners in the adult entertainment industry. Regardless of Flynt's intention, the acquisition is certainly working wonders for New Frontier's value. On the stock exchange, New Frontier has moved from around 1.10 to 2.00 in just 8 months; the biggest jump being from 1.30 to 2.00 during October alone. Overall, New Frontier is seeing an exceptional return of +73.91% for the past 52 weeks… no small feat for a company that has seen significant and perpetual loss in the last 5 years even with no debt to speak of.

Currently, the acquisition of New Frontier Media by LFP Broadcasting LLC is expected to be complete by the close of the 4th quarter. The company needs to sell by December 31st, otherwise Langkloof will join the New Frontier board with its 15.9% of shares. This may not be bad news for New Frontier, however given Langkloof had planned to acquire New Frontier themselves, this could be bad news for Flynt. New Frontier may not have had the best financial success over the past 5 years, but Larry Flynt doesn't seem concerned. Provided New Frontier can reach a mutually beneficial outcome to their current lawsuits, and they are able to continue in the strength of their recent turnaround, New Frontier may have a new corporate head and financial position to celebrate in their near future. Given the fact that NOOF stock is at $1.99, the market certainly expects the deal to be completed soon. Frontier is certainly hot!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Written by a staff writer.