Market Overview

Vice Investing: Taking a Look at Hefner's Playboy Buyout


In a prior article, we noted that “sin stocks” often make good investments because the social stigma associated with industries like tobacco, alcohol, and gambling tends to depress prices, thus allowing investors to buy shares at value prices. Because of the regulatory nature of the businesses, vice industries also tend to have economic “moats” around them, to borrow a term from Warren Buffett. By moats, Buffett is speaking of durable competitive advantages that protect the company from would-be rivals the way a moat protects a castle from attackers.

One vice industry that conspicuously lacks moats is “adult entertainment,” also known as pornography. The proliferation of free internet content has destroyed the profit model of print magazines like Playboy.

Hugh Hefner's creation has fallen on hard times. In its most recent quarter, Playboy Enterprises (NYSE: PLA) reported a $27 million loss, and in the first half of 2010 the company's namesake magazine saw its circulation fall by a full 34%.

Perhaps tiring of hearing his investors complain, Hefner—who founded Playboy nearly 60 years ago—has decided to take the company private in a deal that values it at $207 million.

Interestingly, Playboy might be worth more dead than alive. The company has several valuable assets—bought during more prosperous times—carried at very low values on Playboy's balance sheet. The Beverly Hills Playboy mansion is carried on the books at just $1.2 million but could be worth at least $40 million, according to the Financial Times. The company also has a 5,000-piece art collection that could be worth $20 million or more, among other assets.

Hefner and Co., whatever their moral shortcomings, are shrewd enough businessmen to know that their traditional business model is dead, and they are busily redefining Playboy as a “brand management company,” essentially selling the rights to the bunny logo for clothes, accessories, and themed casinos, resorts and clubs.

We shall see how successful Playboy is in redefining itself. It is difficult to be too enthusiastic about a company when one of its most valuable intangible assets—the iconic, robe-clad Hefner himself—is an 84-year-old man with a reputation for fast living. Current investors might consider themselves lucky that Hefner is buying them out.

In related news, Mr. Hefner announced plans to marry his 24-year-old girlfriend, a former Playmate.

Charles Lewis Sizemore, CFA

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