New Frontier Media Inc. (NDAQ:NOOF) announced yesterday in an 8-K filing with the SEC that activist hedge fund Steel Partners had expressed interest in leading a management buyout. According to the filing:

"At the regularly scheduled Board of Directors meeting of New Frontier Media, Inc., on August 15, 2006, Mr. Warren Lichtenstein of Steel Partners II, L.P., was provided, at his request, an opportunity to address the Board of Directors. Mr. Lichtenstein expressed an interest in leading a 'management buyout' of the shares of New Frontier Media, Inc. Mr. Lichtenstein expressed a willingness to pay a premium over the market price but declined to state the price per share or the amount or range of premium over market price that he is prepared to offer."

Two days after this announcement on the 15th, there were five insiders who obtained 25,000 call options at $7.80 (found in Form 4s). Note that call options are short-term derivatives used to take advantage of short-term price movements. This turned out to be a great buy as the stock moved up around 10% after the 8-K was released yesterday. This just goes to show how important it is to keep an eye on management activity, especially when activist hedge funds are involved.

So, is the stock still a good deal? Steel Partners likely anticipated this announcement and price movement, and therefore are probably willing to pay a premium to even this price if the transaction goes through. The stock is still cheap, trading at just 16x earnings with solid growth, good margins, and a strong cash position. This is definitely a stock worth watching, and perhaps getting involved with using an options play once things get a little clearer.

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