• by David Goetzl , October 16, 2007

Even with Hearst Corp. rescinding its offer to buy out Hearst-Argyle shareholders en route to taking the station group private, analysts believe Hearst Corp. will eventually mount another bid--perhaps after investors lower their expectations and the stock price drops.

Meanwhile, those investors who urged the H-A board to reject Hearst Corp.'s $23.50-a-share bid--believing the station group has significant growth prospects ahead via revenues from retransmission consent, political advertising and digital initiatives--now have the opportunity to see whether their gamble will pay off, unless Hearst Corp. opts to make the more attractive bid that analysts foresee (and succeeds).

That's partly because Hearst Corp. has looked at taking the 29-station group private for at least 18 months; buyout offers generally aren't done as trial balloons.

If Hearst Corp. does not come back with an increased bid, investors may have lost the game of chicken by pressing to reject the $23.50 bid, which represented about a 15% premium on where the stock was trading in late August.

On Monday, H-A stock closed down 6% near the $23.50 offer price, and a continual fall could make investors question their lobbying for rejection. On Friday, Hearst Corp., which had said its offer was good until Oct. 12, said it was off the table.

The company, which owns about 74% of H-A shares, apparently failed in its bid to purchase the additional 16% it had said it would need to take H-A private in a transaction in the $600 million range.

Investors had bid the stock up in the weeks following the offer by about 11% to the $26 range, hoping to induce Hearst Corp. to increase its offer, but Hearst Corp. opted not to get into a bidding war. Still, Bear Stearns analyst Victor Miller wrote Monday that "there will likely be another chapter written" and the "relatively modest" total dollars--perhaps some $75 million--Hearst Corp. would need to up its bid to the more attractive $26 range makes it likely that the company will ultimately do so." Miller did say Hearst Corp.'s refusal to "offer a 'bump' in the price ... was a bit surprising.

JP Morgan's John Blackledge wrote that "we believe Hearst Corp. could revisit this process at some point soon." "While we expect Hearst to be prudent in its approach to purchase (Hearst-Argyle), we continue to believe it would like to acquire the remaining public equity stake at some point in the near term," he wrote.

Investors who had urged the H-A board to reject the $23.50 offer did so on grounds that the station group's future is bright with the potential for increased retrans dollars from distributors. The company recently reached a deal with Cox, a sure-fire boom in political ad dollars from presidential candidates next year. (H-A has three stations that stand to benefit from the early Iowa caucus and New Hampshire primary, and three in the battleground state of Florida). Also, the opportunity for growth in the digital area is strong, with consumer interest in news on mobile devices, along with H-A's aggressive Web ventures, such as a partnership with YouTube.

A special committee of the H-A board seemed to agree, arguing that the Hearst Corp. bid undervalued the company.