Playboy owner Hefner agrees to be taken private

(Crain's) — Playboy Enterprises Inc. stock was up 17% Monday on news that founder and majority owner Hugh Hefner has won board approval to take the Chicago-based adult entertainment publisher private with an increased bid.

A partnership controlled by Mr. Hefner will pay $6.15 a share — up from a July bid of $5.50 — to buy the stock Mr. Hefner does not already control, Playboy said in a news release Monday. That means the partnership will pay about $137 million, plus the assumption of $115 million in liabilities.

CEO Scott Flanders will keep his position and hold a significant stake in the company, Playboy said in the release.

Mr. Hefner's partnership has lined up equity commitments from an affiliate of Birmingham, Mich.-based private investment firm Rizvi Traverse Management LLC for the purchase, and a loan commitment from affiliates of Jefferies & Co., Playboy said.

The price is a premium of about 18% over its Friday closing stock price of $5.20.

Shares were trading at $6.09 just before market close Monday, up 0.89 cents, a 17.1% jump.

In July, Mr. Hefner offered to pay $5.50 a share for the 30% of Class A and 70% of Class B Playboy shares he doesn’t own. Penthouse magazine owner FriendFinder Networks Inc. offered a competing bid of about $6.25 a share.

"The special committee ran its process and I think this is probably the best negotiated deal they’re going to be able to get,” said Coy Monk, a money manager at Charlotte, N.C.-based Afton Capital Management LLC, whose fund owned about 400,000 Playboy shares as of September. Mr. Monk sold about 500,000 shares after Mr. Hefner’s initial bid.

To win approval from shareholders, the tender offer must be attract a majority of votes from each share class, excluding the shares that are held by Mr. Hefner, which he is transferring to the purchasing entity. Plainfield Asset Management LLC and its affiliates have agreed to tender their 19 % of Class A shares in favor of Mr. Hefner’s offer, the company said in the release.

Like many publishing companies, the availability of free Internet content has hurt Playboy's business. The company has turned to increased licensing of its products, including working with partners to open new Playboy clubs, to boost revenue.

Mr. Flanders said in an interview that opening more clubs is a key part of Playboy’s strategy and that the company is in negotiations to open several more, including at least one in Latin America and another in Europe.

Mr. Monk believes that Mr. Flanders and new Rizvi managers will be able to move more aggressively to build licensing, TV and internet revenue while exiting unprofitable businesses that he didn’t specify.

“They can take more dramatic steps that maybe public shareholders might have been concerned about,” Mr. Monk said.

Playboy posted a net loss of $51.3 million in 2009, an improvement over a net loss of $160.4 million in 2008, but the net loss for the first three quarters of 2010 widened to $33.8 million from the year-earlier period.

Mr. Flanders has said in the past that he expects the company to return to profitability this year. He declined to comment today on the outlook. The company posted a small profit in 2007.

The company is looking for business partners to share in operation of the company’s TV and digital businesses, in keeping with the licensing strategy, Mr. Flanders said. The company’s only unprofitable unit is its print business and he said he expects that will continue to struggle.

Playboy’s revenue has plummeted in the past couple of years, to $240.4 million in 2009 from almost $340 million in 2007.

Part of that decline has been a managed reduction of the company’s publishing operation to cut costs. Last year Playboy announced a deal to outsource the licensing of its brand in Asia, and in 2009, it outsourced business functions of its magazine.

The company recently put its headquarters space at 680 N. Lake Shore Drive up for sublease, but a spokeswoman said in October that "there are no plans to move the headquarters to another city." A spokeswoman reiterated that statement Monday.

However, in an interview with Metromix Chicago published in October, Mr. Hefner, who lives in California, said Playboy "probably" would leave Chicago.

“I think we're probably going to be doing that out of economic concerns, yes. We will be probably consolidating on the West Coast,” Mr. Hefner said in the interview.