By Megan Barnett
January 12, 2011

Hugh Hefner wants to take his bunny den off the public market. Here’s why Martha Stewart should follow the Playboy’s lead and watch her lifelong project fade in private.

By Lauren Silva Laughlin, contributor

It’s hard to imagine Martha Stewart mimicking Hugh Hefner. Hef, the celebrated founder of men’s magazine Playboy (PLA), hosts wild parties with young porn stars at his mansion. Martha doles out cookie recipes and gardening tips to middle-aged housewives in magazines and on television through her media company Martha Stewart Living Omnimedia (MSO).

But look past the surface and the companies are shockingly similar, which is why Stewart might want to keep her eye on Hefner’s latest business proposition and follow his lead.

Hugh Hefner started Playboy Magazine in 1953, and over time it has become one of the most well-known businesses in the world, with what remains the world’s best-selling men’s magazine. But the magazine business isn’t what it used to be, especially for smut peddlers. The web has made it easy to quickly satisfy just about any adult fantasy and much of the content is free. Although Hefner has launched new businesses over the years with some success, like the cable show Girls Next Door and its various spin-offs, Playboy has struggled to differentiate itself.

Shareholders have borne the brunt of the shift. A $1000 investment in the late 1990s, when Playboy was at its high, would be worth less than $200 today.

Now Hefner, 84, is taking Playboy off the public market, and it’s a good decision. Earlier this week, he offered $6.15 a share to take Playboy private, a 56.1% premium over the closing price on July 9 last year, the day before Hefner sparked a bidding war with his first proposal. The move will allow him to better do his dirty work in the comfort of his own mansion without the niggling quarterly demands from investors. And it will undoubtedly make for a better final chapter for Playboy, which — let’s face it — won’t be the same without the fixture in the red smoking jacket.

Martha Stewart’s media company is having similar issues as Playboy. It largely depends on selling magazines — her empire includes Martha Stewart Living, Everyday Food, and Martha Stewart Weddings. But circulation revenue was about flat last quarter — people no longer need to access the domestic doyenne to find how to make delicious spaghetti sauce. Much like porn, homemaking tips have been commoditized. Magazine advertising at Martha Stewart Living Omnimedia grew just 1% in the third quarter last year after making some adjustments, according to JPMorgan. The industry grew more than 5%, according to Publishers Information Bureau.

Stewart’s merchandising division — which sells paint at Home Depot (HD), flatware at Macy’s (M), and craft supplies at Jo-ann Fabric (JAS), among other things — is doing very well. It booked more than $5 million of earnings in the quarter, but it still brings in half the revenues as the publishing division.

Martha’s success at Macy’s hasn’t made up for the losses from increased media competition. Her reach on television has plummeted since The Martha Stewart Show moved to the Hallmark Channel from syndication on NBC last year. In the latest quarter, earnings from the broadcasting business were negative after revenues fell more than 47%.

And that’s all with Martha still around. Although she has no plans to leave the company, investors are taking a risk since the company’s namesake is approaching 70 years old. Much like Hefner at Playboy, Stewart is the company’s brand. Magazine and merchandising businesses may be able to hang on without her, but her show — which is a vehicle to hawk said merchandise — can’t. And the broadcasting group makes up more than 10% of revenues.

All these issues have pushed the company’s stock down by more than 20% in the past year — a year in which the overall market rose 13%. Its price today is nearly a quarter of what it was five years ago.

Like Hefner, Stewart controls her company through super-voting stock. Any efforts by shareholders to separate Martha from her company or change its direction would probably be futile. But they can be bought out for the right price, much like Playboy shareholders can. And the price may not be too far off — MSO currently has a market cap of $224 million, slightly higher than Hefner’s $207 million price tag for Playboy.

Martha Stewart may never cross paths with Hugh Hefner, but she could certainly learn from his latest decision as head of his own ailing media empire. Her best choice might be to keep her problems neatly stacked in the comfort of her cozy, well-lit home.

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