Martha Stewart’s CEO May Hold Recipe for Sale: Real M&A

Martha Stewart Living Omnimedia Inc. (MSO)’s new chief executive officer Daniel Dienst has a track record of dealmaking, stoking speculation he may follow the same recipe with the magazines and home-decor company.

The $157 million company, controlled by founder Martha Stewart, last week tapped Dienst to lead a turnaround after five years of sales declines and losses. Dienst led companies that were sold to both private-equity and strategic buyers. After losing $1.7 billion in market value since 2005 and trading below $3 a share for most of this year, a similar path may be the best option for Martha Stewart Living, said Eidelman Virant Capital.

“I don’t think there’s really any other way to maximize shareholder value other than to sell the company,” David Eidelman, president and founder of Eidelman Virant, which owns Martha Stewart Living shares, said in a phone interview. “To me, Martha Stewart has had every opportunity to implement her strategy, and basically it hasn’t worked. At this point, I’d be happy to get $4 or $5” a share from a buyer.

Martha Stewart Living trades at a cheaper sales multiple than most peers, according to data compiled by Bloomberg. The founder should consider taking her company private while the stock is so cheap, said Royce & Associates LLC, which also sees buyers with brand-building expertise as better suited to run the business. Home-shopping companies QVC Inc. and HSN (HSNI) Inc. may be interested, said National Alliance Securities LLC. While shareholder Mario Gabelli isn’t a fan of selling at this low valuation, Noble Financial Group Inc. said Dienst may improve results and enhance the company’s appeal as a target.

Photographer: David Paul Morris/Bloomberg

Martha Stewart Living Omnimedia Inc. paint is seen on display for sale at the Home Depot Inc. store in Emeryville, California. Close

Martha Stewart Living Omnimedia Inc. paint is seen on display for sale at the Home... Read More

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Photographer: David Paul Morris/Bloomberg

Martha Stewart Living Omnimedia Inc. paint is seen on display for sale at the Home Depot Inc. store in Emeryville, California.

Entertaining Advice

Claudia Shaum, a spokeswoman for New York-based Martha Stewart Living, declined to comment on whether the company would be open to selling itself.

Stewart, 72, the TV personality and dispenser of advice on entertaining and home decorating, founded her namesake company in 1996 and took it public in 1999. She served time in prison after being convicted of lying about a 2001 stock sale, and rejoined the Martha Stewart Living board in 2011. She’s now chairman.

The stock, which in 2005 traded as high as $37.40, has since plummeted as sluggish advertising sales and show cancellations pressured its publishing and broadcasting units, even as it secured merchandising agreements with retailers including Macy’s Inc.

Today, Martha Stewart Living shares rose for a seventh straight day, climbing 2.9 percent to a more than seven-month high of $2.85.

Macy’s Suit

While the branded dishes and decor business is profitable, the company is still embroiled in a lawsuit with Macy’s, which claims it had the exclusive right to market certain goods that Martha Stewart Living also agreed to sell at J.C. Penney Co.

Martha Stewart Living and J.C. Penney, which is itself struggling to turn around slumping sales, have scaled back their agreement.

“The advertising industry in and of itself has been under pressure,” Boniface “Buzz” Zaino, a fund manager at Royce, which oversees about $38 billion, said in a phone interview. “You’re fighting that trend and this to-do with J.C. Penny. It’s not been one of my winning stocks.”

New York-based Royce is the second-largest outside investor in Martha Stewart Living with 1.8 million class A shares, according to data compiled by Bloomberg.

Analysts estimate Martha Stewart Living will post a 1 percent increase in sales next year to $164 million. Even so, the company trades at just 0.95 times the projected revenue, a lower multiple than 88 percent of U.S. local media companies valued at more than $100 million, according to data compiled by Bloomberg.

Going Private

With the stock languishing, Stewart herself should consider taking the company private, Zaino of Royce said. Stewart owns all of the class B shares and controls the voting rights.

Buyers in the publishing industry or with experience developing brands may be better equipped to improve profitability, Zaino said.

Stewart could focus on “the skills that she’s good at and someone else could create the strategy that really builds the name and the business -- that’s business school 101,” Zaino said. The risk for investors is “you couldn’t sell it at probably what it would ultimately be worth as a functioning organization.”

He estimated the company would get $4 a share at most in a takeover.

Shopping Networks

In addition to companies involved in brand development, private-equity firms may be interested in buying Martha Stewart Living to gain control of the brand and royalty fees, said Eidelman of Eidelman Virant, which oversees about $250 million.

QVC, which is owned by John Malone’s Liberty Interactive Corp. (LINTA), or HSN could be lured by the chance to leverage the Martha Stewart brand on their home shopping networks, said Robert Routh, director of equity research for National Alliance Securities.

“They have a need and desire for proprietary products that only they have, and they have their distribution already in place,” Routh, who personally owns Martha Stewart Living shares, said in a phone interview.

Representatives for QVC didn’t immediately have a comment. Gigi Ganatra Duff, a spokeswoman for St. Petersburg, Florida-based HSN, said the company doesn’t comment on speculation.

After the company’s legal fight with Macy’s, potential suitors would need to be confident that they could sell Martha Stewart Living products without violating existing contracts, Routh said. Any deal would also need to be structured and priced in a way that’s attractive to Martha Stewart herself, since she has the power to block transactions and likely wouldn’t want to relinquish creative control, he said.

Gabelli Opposed

From a shareholder’s perspective, “it would be absolutely a mistake to sell the franchise today,” Gabelli, CEO of Gamco Investors Inc. (GBL), which oversees about $40 billion including Martha Stewart Living shares, said in a phone interview. “The best alternative is to try to figure out how to take the brand and reposition it to create very significant growth.”

Dienst may succeed in turning the company around, enhancing its takeover prospects, said Michael Kupinski, director of research at Noble Financial in Boca Raton, Florida. He estimates Martha Stewart Living could be valued at as much as about $8 a share, based on the sum of its parts.

Dienst was chairman of Metals USA Inc. when it was sold to affiliates of Apollo Management LP in 2005. He was then chairman and CEO of Metal Management Inc. before selling it to Sims Group Ltd. in 2008. He was CEO of the combined company until retiring in June.

It’s logical to ask whether Dienst, given his history, was brought in to ultimately sell the company, said Routh of National Alliance Securities.

Eidelman hopes that’s case.

The CEO should “take a hard-nosed view at all their businesses and do whatever is necessary to maximize shareholders’ value,” he said. “They’re well enough known that someone should be able to take the product line and the brands and maximize them. The sooner, the better.”

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net

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