NEW YORK — Macrovision Corp said on Friday it would buy Gemstar-TV Guide International Inc for $2.8 billion in cash and stock to form a broad video entertainment distributor, but investors concerned about the deal’s price sent shares of both companies sharply lower.
Macrovision shares dropped 25 percent after the company said it would raise $800 million in new debt to finance the deal, while Gemstar slid more than 17 percent as its shareholders thought the deal price was too low.
“It’s a reaction to the size of the deal and the fact they’re [Macrovision] buying a larger company and taking out debt to do it,” said SMH Capital analyst Scott Berry.
“Strategically I think it makes sense. I think there are significant risks. It’s a big pill to swallow,” Berry added.
Macrovision said it would combine its anti-piracy technology with Gemstar’s interactive television program guide, which is used by cable and satellite operators, to make protected TV shows, films, photos or music available on many more devices. Gemstar also publishes TV Guide magazine.
“For the consumer, (this deal) is all about discovery, making it very easy to find stuff (and) to acquire it, doing an automatic download,” Macrovision Chief Executive Fred Amoroso said in an interview. Amoroso would remain CEO after closing of the deal, expected by early in the second quarter.
“I want to take this movie, store it in my PC and then play it … in my daughter’s bedroom TV,” he said.
Gemstar shareholders would get $6.35 per share in cash or 0.2548 of a share of common stock in a new holding company that would own both Gemstar and Macrovision. Each existing Macrovision share would equate to one share in the merged company.
Macrovision shareholders would own about 53 percent of the combined company. Former Gemstar stockholders would own about 47 percent of the new entity, which would seek continued listing on Nasdaq.
Gemstar stock fell $1.04 to $4.94 on Nasdaq.
“I think Macrovision’s stealing Gemstar,” said Janco Partners analyst April Horace who estimates Gemstar’s value at $7 a share. She suggests that the purchase could have made more sense for a strategic buyer such as Microsoft Corp (MSFT.O: Quote, Profile, Research) or Google Inc (GOOG.O: Quote, Profile, Research), which could have paid up to $9 per share.
News Corp (NWSa.N: Quote, Profile, Research) owns about 41 percent of Gemstar-TV Guide and has agreed to vote in favor of the deal.
“We think it’s a smart combination of businesses,” a News Corp spokeswoman said. “We look forward to seeing how it performs. We will continue to evaluate it.”
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The takeover price represents a 6 percent premium over Gemstar’s closing stock price of $5.98 on Thursday and a 24.5 percent premium since Gemstar put itself up for sale in July.
But the $2.8 billion value of the deal compares with Gemstar’s market capitalization of about $30 billion in September 2000, when News Corp announced a deal that would make it the largest shareholder. At $6.35 per share, News Corp’s stake in Gemstar is worth roughly $1.15 billion.
Macrovision expects the combined company would deliver annual revenue growth of 10 to 15 percent. Executives said on a conference call they expected savings of more than $50 million from the deal.
Commenting on the share slide, Amoroso said on the call that Macrovision’s decision was not based on the “immediate first-day market reaction.” He said he was confident the deal would represent “enormous value” for stockholders over time.
With the combined entity, consumers would be able to pull up a guide on their TVs or mobile phones and receive personalized information on their favorite TV shows or read movie reviews before purchasing or renting films.
“This will develop over the next three to four years, as the enhanced technology comes in,” said Rich Battista, CEO of Gemstar-TV Guide, noting that in that time more consumer electronics devices will have direct Internet connections.
Macrovision Chief Financial Officer James Budge would serve as CFO of the combined company. Battista and Gemstar CFO Bedi Singh would be leaving the organization, the companies said.
Shares of Macrovision fell $6.54 to $19.45 on Nasdaq.