Frederiksen Merger Brings Questions More Than Happily AnsweredIn an industry such as direct response television that has been fraught with litigation and bankruptcy throughout its history, questions always abound when one of the seemingly more successful companies announces a merger.
When The Frederiksen Group announced last weeks that it was being acquired by American Champion Entertainment Inc., Hayward, CA, many industry insiders asked why. Why would Frederiksen, fresh from a reorganization priming the company for a stronger future in new media, merge with a company whose stock has dropped considerably in the last year? More importantly, why would it be bought by this company instead of being the buyer?
"The reason they are buying us is that they are a public company and we wanted to go public," said Lee Frederiksen, CEO of The Frederiksen Group, Falls Church, VA. "To maintain the public listing, American Champion must acquire us. If we acquired them, they would be a private company. From the management and from an accounting point of view, we are a larger entity. We have -- since around February until just a few days ago -- been getting to work with and know these folks and understanding their company, and we have concluded that this would make a perfect relationship.
"From day one, we approached it as something we don't have to do," Frederiksen said. "We were not so much looking for anything, but we were on the lookout for the next step to take us to the next level. We considered an IPO, private investment and merging with a much larger entertainment company, but to us this was the right fit and mix of elements. It brings the advantages of going public and the advantages of a relatively smaller operation where we are not one small piece of a gigantic machine."
The deal will cost ACEI $15 million, mostly in stock and some in cash, said Anthony Chan, president of ACEI. After all the legalities are cleared, Frederiksen will become CEO of ACEI, with the former Frederiksen president and chief operating officer, Thomas Redding, becoming COO at ACEI. Chan, current president of ACEI, will remain in his position, as will company Chairman George Chung. According to both companies, no overlap exists, meaning there will be no layoffs.
Though The Frederiksen Group expects to complete this year with gross revenues of $17 million and ACEI's market capitalization is $7 million, ACEI will appeal to its shareholders to authorize the buyout of the larger company by freeing up some of the $42 million in unissued stock.
"With the right project, we can issue additional shares with shareholder approval -- and I don't see any reason why they won't approve it -- so we will issue new stock to The Frederiksen Group," Chung said.
The decision for the smaller company to buy the bigger was also sensible for other reasons, Frederiksen and Chung said.
First, The Frederiksen Group becomes a public company and will be "able to make more mergers and acquisitions," Frederiksen said.
Second, ACEI -- whose stock on the Nasdaq has fallen from a 52-week high of 19 1/2 to 1 1/8 this week -- has the opportunity to add a company with "solid fundamentals in their financial statements, a great reputation in the business, is clean -- no derogatory items or litigation -- and has been in the business long enough that we think they know what they are doing and are here to stay," Chung said.
"A lot of microcaps, like ourselves, have been hit hard in the downturn of the market, and the microcaps never really recovered. We see ourselves as recovering now, and we would need a company like Frederiksen to serve as a good anchor within our financial statements. We are buying The Frederiksen Group, and what comes along with that is an asset base, customer base, future income and future earning potential."
Frederiksen said the merger would benefit his company in the DRTV realm in three distinct ways.
First, being a public company will "increase our ability to raise funds for growth and expansion of the company and to undertake acquisitions in the marketing services area," Frederiksen said.
Second, ACEI has a strong foothold in China, a major untapped market looking to be cracked open by a DRTV company. In July, ACEI made two major acquisitions in China. It acquired a 50.01 percent share in 21e-sports Co. Ltd., Beijing -- a major Chinese retailer -- and an 80 percent stake in Beijing Wisdom Network Technology, a leading high-speed cable-wiring company that designs and installs fiber optics.
Finally, Frederiksen said that with the addition of ACEI's experience, talent and connections, The Frederiksen Group could broaden the services and content offerings to its clients, with licensing as part of that offering.
"We have been in business for nine years, and over that nine years we have had a strategic vision about where the industry is going," Frederiksen said. "We have always been of the opinion that what makes the business of electronic retailing special is an interesting mix of content and commerce. That is exactly what this deal brings to the table."
ACEI is a media company specializing in sports and family entertainment. Current projects undertaken by its American Champion Marketing Group include FunSchool.com; the computer-animated cartoon series "ReBoot"; "Adventures with Kanga Roddy," a PBS children's show produced by pro football hall of famers Joe Montana and Ronnie Lott and starring Pat Morita of "The Karate Kid"; and Consor, which handles brand management and consultation for Turtle Wax, Skippy, Body By Jake and X-Acto.
Frederiksen said the companies are already working on projects together but that Frederiksen would view ACEI as a client, albeit a very closely related one. Among the many possible projects is original television programming, Frederiksen said.
"The Frederiksen Group will continue to operate as it has operated as an integrated marketing services company, and American Champion will continue to operate as it has been working," Frederiksen said. "The principal relationship will be on projects that make sense.
"We are very familiar with taking entertainment properties and leveraging them -- for example, taking the 'Kanga Roddy' series and turning it into products that are sold. We could produce spots, develop products from scratch, improve and build their Web sites, and bring them additional products to add to an existing property."