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Martha Stewart Recovery Fails as Blackstone Sets Sale: Real M&A

While Martha Stewart may double shareholders’ money in a sale, she can’t come close to making them whole again.

Martha Stewart Living Omnimedia (MSO) Inc., which hired Blackstone Group LP (BX) this week and is considering a sale, may fetch $10 a share, more than twice yesterday’s price, said Noble Financial Group Inc. At $551 million, Martha Stewart Living would still be valued at less than a third of the $1.87 billion in February 2005, according to data compiled by Bloomberg. The stock has since plummeted 88 percent as the founder served time in prison and was barred from public boards and some executive posts after being convicted of lying about a stock sale.

While the owner of the namesake magazine and TV show lost money in seven of the last eight years, its branded dishes and furniture at Macy’s Inc. and Home Depot Inc. are profitable. The New York-based company will consider a sale under the right conditions, a person familiar with the matter said this week. Any deal would have to go through Stewart, 69, who’s rejoining the board and has more than 90 percent of voting power. Private- equity firm Apollo Global Management LLC may be interested, and branding companies like Iconix Brand Group Inc. (ICON) and Jarden Corp. (JAH) may look at merchandising, said Noble analyst Michael Kupinski.

“Martha Stewart is a textbook example of what can go wrong with an entrepreneurial company,” said Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania. “Martha Stewart’s company is undergoing a slow death that is a result of management failing to make a transition to the next generation. They owe it to their shareholders to try to realize as much as possible from a sale.”

Hiring Blackstone

Katherine Nash, a spokeswoman for Martha Stewart Living, declined to comment. Blackstone, the biggest private equity firm, declined to comment, according to spokeswoman Christine Anderson.

Charles Zehren, a spokesman for Apollo, declined to comment. Jessica Macgowan of New York-based Iconix didn’t return a phone call seeking comment. A voicemail left for James E. Lillie, president and chief operating officer at Rye, New York- based Jarden, after regular business hours wasn’t returned.

Martha Stewart Living announced May 25 the hiring of New York-based Blackstone to help review proposals after being approached by parties interested in partnering or investing and to explore other opportunities. The company would consider an outright sale, a person familiar with the matter, who declined to be named because the discussions are private, said on May 25. Stewart, in an interview that day, declined to comment beyond the statement.

Photographer: Mike Coppola/Getty Images

Martha Stewart, founder of Martha Stewart Living Omnimedia Inc. Close

Martha Stewart, founder of Martha Stewart Living Omnimedia Inc.

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Photographer: Mike Coppola/Getty Images

Martha Stewart, founder of Martha Stewart Living Omnimedia Inc.

Prison, House Arrest

Her company is exploring its options after losing $1.67 billion of its market value since February 2005, data compiled by Bloomberg show. Martha Stewart Living was worth $208 million the day before the announcement, and then the stock climbed 23 percent through yesterday. The shares added 11 percent to $5.14 today, for a market value of $283 million.

Stewart was convicted of obstruction of justice for lying about her 2001 sale of ImClone Systems Inc. stock. She served five months in prison and about six months of house arrest.

In August 2006 Stewart agreed to a settlement with the U.S. Securities and Exchange Commission barring her from serving as a director or an officer with financial or legal responsibilities for five years. Martha Stewart Living said this week that Stewart is expected to rejoin the board in the third quarter.

Undersized, Undervalued

“Martha Stewart is a whirlwind of energy and a unique individual, and her absence and lack of control may have impacted the business,” said Chris Marangi, a portfolio manager at Rye, New York-based Gamco Investors Inc. “The company is undersized, underfollowed and undervalued to resonate in the public markets.”

Gamco, which has $35 billion under management, owns 520,000 shares of Martha Stewart Living.

Stewart owns all of the class B shares and controls about 90 percent of the total voting rights. In its 2010 annual report, the company said her concentrated control could deter mergers or takeovers that may otherwise benefit shareholders.

While private-equity firms or big media companies may be interested, David Kestenbaum, an analyst with Morgan Joseph TriArtisan Group Inc. in New York, said he doesn’t see Stewart giving up the reins.

A deal to go private may value the company at more than $750 million, Robert Routh, a New York-based analyst with Phoenix Partners Group, wrote in a note April 8. Investors or an acquirer would be betting on Martha Stewart Living expanding its line of home goods after a partnership with Sears Holdings Corp. (SHLD)’s Kmart ended, he said in an interview. A licensing company could expand the brand globally and collect royalties -- a potential “cash machine,” Routh said.

‘Do It Now’

“It may not be worth $20, but it’s certainly worth more than $5,” Routh said. “I’d take it private at this level. If you’re going to do something, you do it now. In a year or two, it’s going to cost you a lot more.”

Noble’s Kupinski estimates a takeover price of $10 per share, a 116 percent premium over yesterday’s close.

Gamco’s Marangi is not as optimistic, estimating a bid of $6 a share. The company has television, publishing and merchandising all in one, making it difficult to identify a strategic acquirer, he said.

While magazines such as Martha Stewart Living and Everyday Food drew $146 million in sales last year, the publishing unit only generated $2.7 million in operating income, data compiled by Bloomberg show. The merchandising business selling pillows and paint converted $43 million in revenue into $25 million of profit. The broadcast operation lost $1.6 million.

‘Cash Flow Drain’

“All of the areas of the company other than merchandising are a cash flow drain,” Noble’s Kupinski said.

Private-equity firm Apollo in New York has shown interest in buying and licensing similar brands, Kupinski said. Apollo agreed to acquire New York-based CKX Inc. (CKXE), the owner of “American Idol” and the rights to the names and images of Elvis Presley and Muhammad Ali, for $5.50 a share, a 26 percent premium. In a regulatory filing May 17, Apollo said the deal is worth about $560 million.

Brand-oriented companies that sell consumer products, such as Jarden, the maker of Crock-Pot slow cookers and Rawlings sporting goods, and Iconix, which licenses Mossimo, London Fog and Joe Boxer, may also be interested bidders, Kupinski said.

‘Quick Way Out’

Martha Stewart Living is similar to Playboy Enterprises Inc., which has an array of branded products and a dominant shareholder in Hugh Hefner, according to RBC Capital Markets analyst David Bank and Routh of Phoenix Partners. Chicago-based Playboy said it was going private in January for $207 million.

“A sale is a quick way out,” said Peter Sorrentino, a senior portfolio manager at Huntington Asset Advisors in Cincinnati, which manages $14.8 billion. “Martha is still an asset. People have kind of forgiven or forgotten. The Martha Stewart name has not faded completely from view.”

Overall, there have been 10,091 deals announced globally this year, totaling $975.5 billion, a 21 percent increase from the $803.7 billion in the same period in 2010, according to data compiled by Bloomberg.

To contact the reporters on this story: Alex Sherman in New York at asherman6@bloomberg.net; Justin Doom in New York at jdoom1@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Peter Elstrom at +1-212-617-7884 or pelstrom@bloomberg.net.

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