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Taking Martha private

As her namesake company continues to flounder, is it time for a buyout?

by Krysten Crawford, CNN/Money staff writer
Publication: CNN/Money

August 4, 2004

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NEW YORK (CNN/Money) - A little privacy might be just the thing for Martha Stewart Living Omnimedia.

As Tuesday's grim earnings report showed, the once high-flying home furnishing and decorating company continues to hemorrhage amid its founder's ongoing legal plight.

While a debate rages over the best future course for the company -- abandon Martha Stewart completely or try to hold on until she puts her legal woes behind her? -- one measure that some experts are pushing for is taking Martha Stewart Living Omnimedia private through a massive stock buyback.

"I think it's the best way to go," said Howard Davidowitz, a New York retail consultant and investment banker. "The worst place for this company right now is being a public company."

The idea isn't farfetched. Two years ago, as shares of Martha Stewart Living collapsed following an insider trading probe of its namesake's personal stock sales, BusinessWeek reported that Stewart had talked to investment bankers about a leveraged buyout of her company.

Nary a word has been heard since. In the interim, Stewart, who turned 63 Tuesday, has been tried, convicted and sentenced to 10 months of jail and home detention for lying to government investigators looking into her suspicious 2001 sale of ImClone Systems (IMCL: down $0.45 to $57.59) shares.

More bad news

Stewart's brainchild, Martha Stewart Living Omnimedia (MSO: down $0.15 to $11.25), has suffered as her legal troubles have steadily worsened. Last year, for the first time since it went public in 1999, the company reported an annual loss as skittish advertisers fled its flagship magazine and a syndicated television show.

Midway through 2004, the bottom line is looking even more anemic. The company reported Tuesday a second-quarter loss of $19.2 million, or 39 cents a share. Analysts surveyed by earnings tracker First Call forecast an average loss per share of 33 cents.

The results followed a first-quarter loss of $20.1 million, or 41 cents a share.

As she has in the past, Martha Stewart Living CEO Sharon Patrick blamed the deteriorating finances on the company founder's legal case. She announced further steps indicating that the company's strategy now is to focus on building non-Martha Stewart brands.

Experts who argue that Martha Stewart Living won't recover its former glory without the queen of domesticity say more drastic measures may soon be necessary. One option is to put the company up for sale. Another option is to go private once more.

With a leveraged buyout, Martha Stewart Living would no longer come under the harsh glare of the public spotlight, thereby giving it the time and space to rebuild without having to answer to Wall Street or regulators.

Going private would also raise the possibility that Stewart, who faces a lifetime ban on serving as a director or officer of any public company, could return one day to the company's helm.

And with its stock trading around $11 a share -- nearly half its level 2 years ago and about one-fourth its peak in 1999 -- the price is low.

"I wouldn't rule it out," said James O'Rourke, a professor of management at the University of Notre Dame. He said a leveraged buyout alone wouldn't solve the company's problems. But engineering a turnaround would be "much easier to execute if they're private."

Wanted: risk-takers

The hurdles to going private are high. For one thing, the company would have to offer existing shareholders a premium -- Davidowitz, the retail banker, suggested $13 a share -- that would value the company at $643 million.

Martha Stewart owns about 60 percent of the company, worth $386 million. To acquire the company she would need an additional $257 million.

Martha Stewart Living could buy back some, but not all, of the remaining outstanding shares. As of June 30, the company had $158 million in cash on hand and is debt free. But Davidowitz said the company needs at least $50 million of that horde to help rebuild.

That means a consortium of outside investors would have to finance a chunk of the stock repurchase. Stewart, who holds more than 90 percent of the company's voting stock, would have to relinquish control of her company.

Finding financiers willing to take the gamble would not be easy.

"The number of potential players is very small," said O'Rourke.

O'Rourke said Martha Stewart Living is making money from furniture sales and its exclusive deal with Kmart to sell Martha Stewart Everyday home furnishings. But, he added, the suspension of original programming of Martha Stewart's home decorating and cooking television show and a decline in Martha Stewart Living ad pages weaken the company's distribution channel.

In the end, O'Rourke thinks the risks of a leveraged-buyout of Martha Stewart Living would be considerable for a private investor. "But that doesn't mean somebody won't take them," he said.