CKXE - Buyout Update & Overview

I wanted to provide an update of what is going on with CKXE in order to simplify the rather confusing buyout transaction. If you want a complicated, non-contextual version, you can go here.

The basic premise of the buyout is that CKXE will be going private in a dynamically priced transaction with prime assets like American Idol and the Elvis/Muhammed Ali/Beckham licensing going back into the pockets of CEO Bob Sillerman and 19x CEO Simon Fuller. The transaction is cleverly engineered as it once again demonstrates Sillerman's masterful use of the public markets to build upon his already massive wealth by taking the profit heavy IDOL franchise away from the public in exchange for the debt heavy real estate ventures (FXRE) in Vegas and Graceland. Let's run down the basics of the deal:

• CKXE goes private and IPO's FXRE, a real estate company with prime land in Vegas and exclusive licensing rights to exploit the Muhammed Ali and Elvis Presley names in real estate ventures.
  
• Shares of FXRE have been issued to CKXE shareholders as of January 10th at a ratio of 2 shares of FXRE for every 10 shares of CKXE held.
• The current CKXE share price of $9.40 reflects the sell off from arb players following the ex-div date (Dec 31) of the FXRE shares.
• The final payout of CKXE is contingent on the value of FXRE shares during a 20 day measuring period following the IPO of FXRE. By way of example, if the average trading price of FXRE during the measurement period is $5.00, $10.00, $20.00 or $30.00, CKX stockholders will have received $14.38, $15.00, $16.25 or $17.75 in cash and liquid securities. This means that selling CKXE at $9.40 is pretty silly at this point considering the fair cash value is between $10.75-$12.75 per share.
  
• Additionally, CKXE shareholders have recently been proposed to participate in a rights offering of FXRE shares at $10 per share. Shareholders will be eligible to buy 1 share of FXRE for every 2 shares of CKXE they own. Assuming the current price of FXRE shares ($7.00) is going to change over the coming weeks, the rights offering may become attractive.
  

FXRE Stock     Adjustment   Cash Received  Total FXRE   TOTALS
Price        in Cash       at Closing   Stock Value
during     Consideration ($13.75 minus  Received per 
Measurement  (7.5% of FXRE   Adjustment     CKX share 
Period     Stock Price)     Amount)    (Two shares  
                                         of FXRE  
                                        stock for   
                                        every ten 
                                        shares of
                                        CKX stock
                                          owned) 
------------ -------------- ------------- ------------- ---------
   $5.00         $0.375       $13.375         $1.00   $14.375
------------ -------------- ------------- ------------- --------
  $10.00          $0.75        $13.00         $2.00   $15.00
------------ -------------- ------------- ------------- -------
  $15.00         $1.125       $12.625         $3.00   $15.625
------------ -------------- ------------- ------------- --------
  $20.00          $1.50        $12.25         $4.00   $16.25
------------ -------------- ------------- ------------- -------
  $25.00         $1.875       $11.875         $5.00   $16.875
------------ -------------- ------------- ------------- ---------
  $30.00          $2.00        $11.75         $6.00   $17.75
------------ -------------- ------------- ------------- --------
  $35.00          $2.00        $11.75         $7.00   $18.75
------------ -------------- ------------- ------------- --------

Now that the transaction is summarized, let's try to put a book value on FXRE. The Park Central property that FXRE owns (one of the last prime lots remaining on the central Vegas strip) has a real estate value of $360mm based off the recent acquisition of the other 50% by FXRE at $180mm. So if nothing is built on that land, the book value of the lot is minimally at $360mm. FXRE also owns over 1.1mm shares of RIV, which is worth about $30mm at today's price. An attempt from FXRE to acquire the rest of RIV was voted down by the RIV board, but will likely be back on the table if the price of casino stocks continues to decline and FXRE is able to use their public equity as strength. FXRE also has rights to the development of 100 acres connected to Graceland for three potential hotels/shopping centers/etc. Adding the real estate and common stock of RIV, FXRE has about $390mm of assets in their possession, however, there are licensing costs, some existing loans, and an inevitable debt burden which is yet to begin.

One of the releases stated that the distribution of FXRE shares to CKXE holders would amount to 50.25% of FXRE common stock. Using the 2 shares for every 10 ratio, this means approximately 19.5mm shares were distributed. The rights offering guarantees another 9.9mm shares for $99mm. The other 25% (9.9mm) will be kept by Sillerman and his endless array of entities. With this being said, it is expected there will be about 39 mm total shares of FXRE upon it's listing. At a $10 rights offering, this would give a market value of FXRE at $390mm, which is virtually identical to the book value of their assets (land & RIV stock). The added value, according to CKX, comes from their exclusive rights to build real estate themes around Elvis (Graceland) and Ali/Elvis (Vegas), but the reality is that FXRE will be in debt up to their eyeballs.

Sillerman will be the CEO (huge) of FXRE and has bypassed any salary in exchange for 6,000,000 options at $20/share, a move I would consider to be far more bold if he wasn't already a billionaire who's trying to reduce his cash payout from taking CKXE private. The management team is in place behind Sillerman, and the deal looks as if it is going to go through with Credit Suisse and Deutsche Bank funding the CKX buyout group and their exotic transaction.

Due to the awful timing of entering into a capital intensive, debt-laden real estate transaction, I only like the FXRE prospects because Sillerman is taking the reigns as CEO. The more you know about the guy, the more you realize that he really wants to own a grandiose Vegas casino/hotel and if history is any indicator, he usually gets his way. He is smart enough to not deal with billions of debt on his personal balance sheet, so he will once again use the public markets to fund his toys and hobbies. By the time FXRE needs to enter into large borrowing transactions (mid '09), the lending activities of investment banks may be returning to a more normalized state. Assuming FXRE can obtain the capital to pull off it's Vegas ambitions, it should be good for shareholders, but as always, great for Sillerman.