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The $14.17 offer per Sonic share is a 38% premium over the average price in the past 30 days, which seems like a reasonable sweetening of the common shareholder's pot. However, it's just barely above the previous 52-week high of $14.02 per share, set in April. Moreover, it's not a guaranteed all-cash payout but a less attractive deal structure with a stock-swap component. The predictable result: a bevy of shareholder lawsuits accusing Sonic Solutions' leadership of not extracting maximum value for its shareholders.
The legal eagles point to analyst target prices as high as $17 per share, but they fail to point out that other estimates to Sonic's value go as low as $12 per share. I guess lawyers have to eat, too.
This deal makes perfect sense from a business point of view. The product portfolios of the two companies hardly overlap at all, but baking them together could create a compelling range of easy-to-organize and highly monetized media creation products. Digital media is red-hot right now, driven by the proven success of Netflix (Nasdaq: NFLX ) in that space and a pile of respectable e-businesses casting bedroom eyes at the opportunities there.
If the offer sparks interest from other interested Sonic buyers, I don't think Rovi is equipped to put up much of a fight. The heavy stock-swap aspect of the bid is one red flag. Another is that Rovi doesn't have much cash on hand. The company claims that the cash portion of the transaction will come from existing cash balances and is not contingent on extra financing, but then it says that a completely unrelated $500 million term loan will be used for general corporate expenses. Ergo, we're emptying our coffers and will need some credit -- just don't call it a part of the deal!
Rovi is bending over backwards to make the deal seem ironclad when it really isn't. Those disgruntled Sonic shareholders may be onto something here. Sonic's Roxio software suite could be a consumer-friendly addition to Avid Technology (Nasdaq: AVID ) , though that would be more a merger of equals than a buyout. Adobe Systems (Nasdaq: ADBE ) could finance a higher offer with less than a year's worth of free cash flows, and a billion-dollar deal would be small potatoes for Sony (NYSE: SNE ) , which could use both a stronger Stateside foothold and a market-leading media creation suite.
I wouldn't be surprised to see a bidding war break out over Sonic Solutions. In fact, I'll be flabbergasted if it doesn't.
The future of entertainment is digital, and Sonic Solutions is an important player in that market. Grab a free report to see two other stocks set to ride this massive growth wave over the next few years.