Hollywood Media Corporation provides the opportunity to buy into the Movietickets.com franchise for essentially free.  I know everyone hates paying that $1 ticket charge to buy tickets online, but now you have the opportunity to own a piece of that business for nothing.

Hollywood Media is comprised of various businesses focusing primarily on online ticket sales, deriving revenue primarily from Broadway, Off-Broadway and London's West End ticket sales to individuals and groups, as well as advertising and book development license fees and royalties. They also have the  Broadway Ticketing business includes Broadway.com, 1-800-Broadway, Theatre Direct and Theatre.com. These businesses together are the Theater Direct business segment and accounted for 96% of 3Q:2010 revenues.  Hollywood Media's businesses also include an intellectual property business, the U.K. based CinemasOnline companies ("CinemasOnline") and a 26% minority interest in MovieTickets.com, Inc. ("MovieTickets.com").

In 2009, the company set out to monetize its Broadway Ticketing Business through an auction process.  On December 22, 2009, Hollywood Media entered into a stock purchase agreement with Key Brand Entertainment Inc..  While this sale has taken a year to close, resulting in deal fatigue for investors, it appears likely that closing will occur in the first half of December. Upon completion of the transaction the company has committed to returning roughly half of the current market cap to shareholders.

Assuming the deal closes, (i) Hollywood Media will receive $20 million in cash, (ii) Key Brand will issue Hollywood Media a five year second lien secured promissory note in the initial principal amount of $8.5 million at an interest rate of 12% per annum, (iii) Hollywood Media will receive an earn-out from Key Brand of up to $14 million contingent upon reaching certain revenue targets.  The second lien is secured against the Theater Direct assets with the first lien capped at $15 million.  This lien has a high likelihood of repayment as the Theater Direct business is expected to generate over $7 million in EBITDA in 2010.  $6 to $8 million of the earn-outs are reasonably likely to be reached within the first 3 years.

Hollywood's management is incentivized through change of control payments and distributions to sell the assets of the company.  Net of these payments, HOLL's pro forma balance sheet will have $27 to $28 million in cash once the deal closes.  Including the second lien, $35 to $37 million of Hollywood's current $41 million market cap will be in the form of cash and investments.  As a result, investors are paying virtually nothing for earn-outs of roughly $2 million per year and Hollywood's 26% stake in Movietickets.com.  Management has stated that they are committed to returning $18 million to shareholders once the deal closes with Key Brand.     

Hollywood's management believes that Movietickets.com can achieve $20M in EBITDA by 2012.  I could see the company selling their Movietickets.com stake at that time for 10 to 12X EBITDA and achieving NAV ranges of $1.80 to $2.10 per share.  However, Hollywood has $225 million in tax loss carryforwards which could also be monetized by investing the current cash or future proceeds into a larger Movietickets.com stake or another business. 

Rumors have been swirling of a merger between Fandango and Movietickets.com.  Movietickets.com provides much better economics to the theater owners.  I believe a deal will close between the two companies within two years.  The dynamics in the movie ticket business are very positive, with several large contracts coming up that can easily move away from Fandango. The strategic value of Movietickets.com could be higher than 10 or 12x ebitda, especially if you think about combining Fandango and Movietickets to one entity that can go from charging $1 to $2 per ticket to an advertising model with higher volumes. I think Movietickets is a $200 million asset with the potential of being a $500 million asset when combined with Fandango.

RISKS. 
1) Sale of Theatre Direct doesn't go through. Key Brand has some financial issues and is in violation of its bank covenants. However, Key Brand has indicated that it has received a waiver and that its lenders have granted verbal consent to close the transaction using cash on hand. They are still awaiting written consent. If Key Brand is unable to close, a break-up fee of $1.2 million is due HOLL. However, the proxy indicates that there was at least one other serious buyer for Theatre Direct during the 2009 sales process. Through the first 3 quarters of 2010, Broadway.com's YTD EBITDA is up 33% and revenue growth accelerated to 16% in the most recent quarter, mitigating this concern somewhat. Moreover, the deal environment is far more favorable now than mid-2009, when the auction process started.

CATALYSTS

1)     Deal closes with Key Brand

2)     $18 million returned to shareholders

3)     Possible merger between Movietickets.com and Fandango