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Playboy in Play

|Includes: Playboy Enterprises Inc. (PLA)

Do you know the value of Playboy? Is it even possible to know the value of intellectual property? Hugh Hefner, iconic founder and chairman of the flagship American lifestyle brand Playboy, has made a 40% premium tender offer to buy the company outright. WSJ tells investors to take their money and run, presumably to avoid being jerked around by the uncertainty of the online adult-entertainment business.

We are at one of those moments in history when the transitioning of media–in this case, from DVD and TV to Internet–has thrown a vast cloak of uncertainty over the valuation of intellectual property. Bid/ask spreads are out of whack. Hence the vast difference between the market price of Playboy and Hefner’s bid.

So is it ever possible to know the value of any IP, which is really just a discounted projection of future cash flow? Absolutely. Here’s how.

In the mid-80s, there was a similar uncertainty regarding film rights (caused this time by a transition from over-the-air TV to cable TV), when Ted Turner acquired the pre-1986 titles from the MGM library for a net $750 million (he first bought the entire library for $1.5 billion, and then promptly re-sold the newer titles to Kerkorian)–a figure which everyone said was vastly overvalued. Of course, the rest goes down as business legend: Using that $750 million library of old titles, Ted Turner built the US cable-TV industry and a business that was ultimately valued at $7.5 billion in 1996.

Why was Turner so smart? Well, no one knew about the cable TV industry because no one had really invented it yet. Since Turner was essentially the inventor, he knew the value of the MGM library because he had the “buyers” of his content already lined up. Everyone else was just flailing around in the dark.

Flash forward to 2005. Rupert Murdoch, septuagenarian extraordinaire, buys teen lifestyle site MySpace for $580 million. Everyone says the old man vastly overpaid. The old man immediately signs an advertising agreement with Google that would pay a guaranteed $900 million over two years. Ka-ching is the sound of an old man schooling his students.

Murdoch, being the king of media, knew how much Google would pay before he even bought MySpace. He knew the value of MySpace because he had his “buyers” lined up already. Everyone else was just shooting blindfolded.

So here’s the rub: Is Hef a Ted or Rupert? Does he know the value of Playboy? Does he have his buyers lined up? Or are he and his private equity buddies just shooting seeds into thin air?



Disclosure: no positions