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Why Should Hefner Have All the Fun?

Hugh Hefner wants to “reinvigorate the brand” he created by taking Playboy Enterprises private.

Playboy founder Hugh Hefner
Byron Gamarro | Getty Images
Playboy founder Hugh Hefner

That’s what Hugh Hefner, the 84-year-old velvet-robe-wearing founder of Playboy, told a reporter for The New York Times last year about the magazine empire he started in 1953.

Playboy has struggled mightily in recent years in the face of competition from the Internet, but while generational tastes may have shifted, Hefner still hasn’t lost his love for blondes—or his magazine.

That perhaps helps explain why Hefner announced last week that he had made a bid to acquire all the stock of Playboy Enterprises that he doesn’t already own.

In a letter to Playboy’s board—of which he is not a member—Hefner disclosed his bid of $185 million. But he also made something else plain: “I am not interested in any sale or merger of the company, selling my shares to any third party or entering into discussions with any other financial sponsor for a transaction of the nature proposed in this letter.”

In other words, Hefner is only interested in selling his bunnies to himself.

And in case it wasn’t clear, Hefner took to Twitter in the days after he made his bid. “My interest in taking Playboy private is prompting some crazy rumors. Playboy isn’t in play. I’m buying, not selling,” the octogenarian said in a post.

With 69.5 percent of Playboy’s Class A common shares, Hefner has de facto control of the company, even though he owns only 33.7 percent of the company’s class B shares, where most of the economic value resides. The B shares, however, have no vote.

Like many family-controlled media companies, including The New York Times Company, Playboy has a dual-class stock structure. Such arrangements are meant to help the controlling family protect the editorial integrity of the product when an unsavory suitor comes along.

But Hefner’s bid raises an important question: Should Hefner—or any other dual-class owner—be able to buy his or her company from the public without any competition?

Already, Playboy is attracting rival suitors. Just days after Hefner made his bid, worth a whopping 40 percent premium over Playboy’s share price, the owner of Penthouse magazine countered with an offer of $210 million. FriendFinder Networks, Penthouse’s parent, even said it would let Hefner continue to run Playboy magazine and live in the mansion.

But Penthouse’s offer, worth 13 percent more than Hefner’s bid, will likely be for naught. Playboy’s special committee of independent directors, which will weigh the offers, has only one real choice: To sell to Hefner, or not at all.

“Penthouse is just looking for publicity. They’re not in the picture,” Hefner wrote on Twitter, quickly batting down its proposal.

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But should the company be able to ignore a rival offer like that? Why should public shareholders be disenfranchised from competing bids when a controlling shareholder wants to take a company private?

David Miller, an analyst for Caris & Company, once said—morbidly—that the best thing that could happen to Playboy’s shareholders would be for Hefner to pass away.

“We believe Hefner’s death could result in a material stock price uptick,” Miller wrote in a note to investors before Hefner made his bid. Already several shareholders have filed a class-action suit against Playboy and Hefner seeking to enjoin them from pursuing a sale that the suit describes as “a self-dealing going-private proposal.”

To be fair, Playboy’s shareholders bought into the company with their eyes wide open. The company’s dual-class structure—and Hefner’s views about never selling—have long been widely known.

Mario J. Gabelli, a money manager who for some time has made investments in dual-class structured media companies, said that as much as he wished his investments would become “in play” when a controlling shareholder wants to take it private, he said, “we buy the stakes knowing this can happen.” (He is not a major Playboy shareholder. “We gave up on them long ago,” he said.)

But Gabelli’s experience with another media company, Cablevision , may prove instructive. The Dolan family, which controls Cablevision, sought to take the company private several times. Cablevision would have made a ripe target for Time Warneror others, but the family said it would not entertain outside bids.

“We didn’t trust them,” Gabelli said of the Dolans. He worried that the family would find a way to buy out the minority shareholders at a discount since there would be no competition and then turn around and sell the company for an ever bigger price tag several years later. Gabelli had sought a “clawback” so that public shareholders would be compensated if Cablevision was sold later. The deal was ultimately rejected and shelved.

What Hefner wants to do with Playboy is unclear. In one of his regular messages on Twitter, he wrote, “If I can satisfy my minority shareholders, I think taking Playboy private can help reinvigorate the brand. That’s how we began.”

His bid is being backed by Rizvi Traverse Management, a private equity firm based outside Detroit that has a stake in theInternational Creative Managementtalent agency. Of course, if it acquires Playboy, Rizvi, unlike Hefner, will want to exit its investment at some point. At least for now, Hefner cannot see that day.

After hours of posting on Twitter, Hefner concluded, “I’ll be playing games with the girls tonight, probably dominos or Uno. Any game with Playmates is fun.”