Playboy: Is The Bunny A Bargain?

The magazine, the mansion, the parade of playmates. It's no wonder men of more than one generation have dreamed of someday donning Hugh Hefner's pajamas.

If one of them could put the right deal together today, he could take over Hef's brand at a bargain price.

Just as the founder is now showing his age, the bunny-eared empire known as Playboy Enterprises (PLA, news, msgs) has figured out how to lose money selling nude photos of beautiful women. Investors have turned cottontails and run, selling the stock down so low that it looks like a steal for the right takeover artist.

Around $2.50 a share, the company's total stock is worth about $84 million. That's less than the estimated value of the company-owned Gothic-Tudor Playboy mansion that's been home to so many infamous parties and pairings.

Throw in the rabbit-ear brand, the flagship magazine, a TV division and decades of original artwork from icons such as Andy Warhol, and you have an empire that is still easily worth more than $500 million.

Yet the market currently values Playboy at just $159 million -- that $84 million market capitalization plus $75 million worth of debt (that's total debt of $155 million minus cash in the bank).

In fact, several potential buyers are thought to be looking at taking over Hef's empire -- no doubt followed by long days working to revive it, spent in a bathrobe with pipe in hand.

Why doesn't the empire Hef built get any respect on Wall Street? Like most media companies, Playboy is suffering a sharp pullback in advertising. Unlike most others, Playboy's market share continues to be eroded by readily available pornography on the Internet -- porn that makes Hef's once-shocking magazine these days seem shockingly tame.

Negative trends hit Playboy hard again in the second quarter. Including charge-offs for a much needed downsizing (Playboy recently closed its New York office), the company reported a huge $8.7 million loss in the second quarter, or 27 cents a share. Sales fell across the board, dragging overall revenue down 15%, to $62.2 million from $73.4 million a year ago.

Management is also in transition. At 83, Hefner remains the largest shareholder, but he passed the CEO reins to daughter Christie 20 years ago. She stepped aside in January, and former Freedom Communications CEO Scott Flanders took over. His résumé is long on publishing but doesn't suggest he knows anything about porn.

So there are good reasons to doubt Playboy stock. But the Street is overlooking a collection of hidden gems inside the empire worth much more than the company is going for today.

The Playboy brand: $200 million

People around the world know the Playboy rabbit logo. "'Excellent brand' is an understatement," says Gabe Fried of Streambank, a company that specializes in valuing intellectual assets.

How much is the bunny's brand worth? For help with that, I turned to experts on brand valuation at Boston's Gordon Brothers Group, which regularly purchases consumer brands. Along with some partners, Gordon Brothers recently bought the Polaroid brand for about $88 million. It also owns the Sharper Image and Linens 'n Things brands.

Based on Playboy's current annual licensing revenue of about $39 million, Gordon Brothers' Ken Frieze estimates the Playboy brand would sell for at least $150 million. But Frieze is being conservative, assuming flat revenue growth from licensing fees.

(Playboy's licensing fees are in decline right now, but Frieze says that may be simply a reflection of the current economic mess.)

Playboy has big plans for the brand. "In no way do we believe that we have reached the limit of what the licensing business can do," says Martha Lindeman of Playboy investor relations.

It has already licensed the logo for use on products as varied as women's lingerie, cigars and jewelry, and for use by the Palms Resort Casino in Las Vegas. The company has made a deal to have the Playboy logo on an entertainment venue in Macao in 2011. It's planning to launch a hotel-restaurant in Miami's trendy South Beach area and a gambling and entertainment venue in Mexico. "We're trying to build a pipeline that would allow us to build a venue every year," Lindeman says.

Plus, Playboy is rolling out branded consumer products in China, India and Latin America. It could also branch out into entirely new lines of business, like a modeling agency, Streambank's Fried says.

Because the recession won't hold down licensing revenue forever and there are still a lot more possibilities, I'll up Frieze's conservative estimate of the value of the brand to $200 million.

Playboy content: $180 million

Sure, Playboy magazine is in decline. But it had a monthly U.S. and foreign circulation of 3.5 million last year, and given its popularity among young males, a key demographic, the magazine is still attractive to advertisers. Based on circulation numbers and revenue potential, the magazine is probably worth $50 million.

Likewise, revenue from Playboy's TV division -- which offers content such as "The Girls Next Door," "Foursome," "Naughty Amateur Home Videos" and "69 Sexy Things to Do Before You Die" -- is struggling as viewers switch to video on demand, where Playboy has less of a presence. But at a conservative six times annual revenue, the division is worth about $130 million.

This brings the total value of Playboy content-producing divisions to $180 million.

The Playboy mansion: $100 million

Hef's company bought the Playboy mansion in 1971 for $1.1 million. Over the years, Playboy has put $14.3 million into the place. The 29-room mansion on 5.5 acres in Los Angeles' tony Holmby Hills area has a pool, a tennis court, a wine cellar, a gym and all the other amenities befitting, well, a playboy like Hef.

Playboy carries the mansion on the books at just $1.4 million, but it is worth far more. John Woodward IV, a Coldwell Banker real-estate agent who has worked in the Los Angeles market for more than 30 years and recently sold three homes near the Playboy mansion, thinks it could fetch more than $100 million. That may seem rich, but Woodward's estimate is $50 million lower than the current asking price on a mansion down the street built by TV director Aaron Spelling, and Hef's abode has much more charm and allure.

Woodward's estimate excludes any commercial value the mansion would have as a museum like Graceland, Elvis Presley's former home in Memphis, Tenn. However, it's not clear a buyer could convert Hef's mansion into a museum, says Jahn Brodwin, who specializes in location-based entertainment valuation at FTI Consulting. So we'll stick with Woodward's original estimate: $100 million.

The Playboy artwork: $20 million

Hef regularly commissioned some of the best contemporary artists to do work for Playboy, including Warhol, LeRoy Neiman, Alberto Vargas and Tom Wesselmann. Hef also used cartoonists Harvey Kurtzman, Will Elder and Jack Davis, who also worked at Mad magazine.
This work has given Playboy a treasure-trove of art, says Jared Green, an art expert with Dallas' Heritage Auction Galleries who has sold several pieces from the Playboy vault. Playboy estimates it has more than 5,000 pieces of original artwork.

Green says works by Vargas can fetch $40,000 to $75,000 each, while Neiman pieces can go for $15,000 to $200,000. The Playboy offices in Chicago boast a Wesselmann painting that could be worth around $2 million, Green says. Cartoons by Kurtzman, Elder and Davis can sell for $5,000 each. "There hasn't been a lot of it out there, so when it comes out, it gets scooped up," says David Epstein, a collectibles dealer with American Coin Vault in New York.

Increasingly, companies are selling off artwork because it's an asset that's not bringing money in for shareholders, Green says. Don't be surprised if Playboy does the same. "We are not in the art collection business," says Lindeman.

Playboy couldn't put all that art on the market at once. But 5,000 pieces of artwork at a low-end average value of $4,000 each would still put the value of Playboy's collection at $20 million. And this doesn't even include the vault of original manuscripts from famous authors such as James Baldwin, Saul Bellow, Jimmy Breslin, Graham Greene and Hunter S. Thompson.