Only three months after making a $500 million acquisition, diversified media company Penthouse Media Group International announced that it plans to sell shares to the public. For the acquisition-hungry company, this is a natural next step, but the details of the proposed filing are surprising.
In typical PMGI fashion, few details accompany the big news. The company has only announced that it is planning an initial public offering in order to raise $250 million. In an interview on Dec. 21, 2007, CEO Marc Bell said he will disclose no more than necessary until "if and when we decide to go public." During that discussion, he refused to discuss the capitalization of his company at all.
With the likelihood of an IPO in 2008, Bell has told only what is necessary. The intent is to recapitalize the company, replacing existing debt with equity financing. But little more has been revealed. PMGI has not indicated how much of the company is being offered to the public, so the proposed valuation of the company is not clear. If half the company is to be offered, the anticipated market value would be $500 million until shares start to trade. But if Bell is offering only 25 percent of the company's stock, the value of the company on the first day of trading would be pegged at around $1 billion.
The decision to pursue equity capital via an IPO is a bit unusual, particularly given PMGI's ability to raise private equity capital in the past. According to insiders, it is likely that the acquisition of Various Inc. was fueled by outside capital, which would imply an ability to bring investors to the table in fairly substantial numbers. In light of the capital needed to acquire Various, $250 million seems rather modest.
There are two likely reasons for the decision to go public. They are quite different, making it difficult to ascertain the motivation behind Bell's decision or determine whether the decision is a good one. One thought is that the nature of the debt is driving PMGI to recapitalize, as the company wants to replace high interest payments with equity that has no ongoing cost associated with it. On the other hand, the decision may be a strategic play, positioning PMGI for a secondary offering to be used as an exit strategy for existing equity investors.
While there is no indication that the cost of the debt to be replaced is high, PMGI must be highly leveraged. The numbers suggest it. As announced, the combined entity's estimated revenue is $340 million. Earlier press releases indicated that Various had $200 million in revenue. As a result, a company with a presumed $140 million in revenue pulled together $500 million to acquire Various. There probably was some debt component to the deal, and the interest rate must have been substantial.
But the debt scenario is not guaranteed. It is entirely possible that PMGI has debt with a low interest rate and that the company simply wants to swap it for equity financing. In this case, there would have to be a strategic reason for an IPO. Among the most popular reasons for a small IPO (e.g., $250 million) is to provide a foundation for a larger secondary offering, which will serve as an exit strategy for the investors.
