Investors are hoping for a major deal to come from a potential Hulu buyout. Currently the three owners of Hulu are The Walt Disney Company (NYSE:DIS), Comcast Corporation (NASDAQ:CMCSA), and News Corp. Obviously, Disney, Comcast, and News Corp shareholders want the biggest bid possible, whereas Netflix, Inc. (NASDAQ:NFLX) may be put in a difficult competitive position depending on the new direction of Hulu. Yahoo! Inc. (NASDAQ:YHOO) and Google Inc (NASDAQ:GOOG) would be thrilled to add another company to their portfolio. They’ve both got plenty of cash to burn.
Disney is likely to benefit the most as it has a conflict of interest between owning Hulu and selling its content to Netflix, Inc. (NASDAQ:NFLX). Disney’s investment strategy is fairly simple: collect revenue from its digital media properties and reinvest it in theme parks and other properties. Netflix, Inc. (NASDAQ:NFLX) is expanding internationally and exposing Disney movies to larger audiences may help Disney build its in other parts of the world.
Who will buy Hulu?
Both The Walt Disney Company (NYSE:DIS) and News Corp disagree on how Hulu should be operated. Disney would like to sacrifice short term profitability in favor of a growing membership. News Corp prefers to monetize Hulu immediately. Both seem to have good intentions for the network, but the business interests do conflict, which is why its time to sell.
Comcast Corporation (NASDAQ:CMCSA) and News Corp will not want to sell Hulu to DIRECTV (NASDAQ:DTV), even though DirecTV has an offer on the table of $1 billion. Ownership is not anxious to give a competitor another monetization tool, so you should expect the offer from Time Warner Cable Inc (NYSE:TWC) to also be rejected.
Let’s not forget that Hulu’s management may feel uncomfortable with a bid from a cable company. Cable operators currently buy content directly from media companies. So any cable company that attempts to acquire Hulu would have to divvy up cash to buy content for both cable and web subscribers. It’s also possible that Hulu may become underfunded if a cable company had complete control of the company. Media streaming over the internet is in direct conflict with the legacy business of offering cable services for televisions.
Private equity isn’t the answer
Source: Preqin
There are various bids from private equity (KKR&Co, and Silver Lake Management), but even these companies will have trouble acquiring Hulu. The number of offers for Hulu is increasing, and bids are starting to reach over a $1 billion. The price is getting so high, private equity may find it difficult to compete. Generally, Private equity firms need to diversify holdings, and it’s doubtful any will over pay to get Hulu.
Kohlberg Kravis Roberts is the third most well capitalized among the private equity companies on the top twenty list, and it’s the most well-funded private equity bidder amongst the bidders for Hulu. But if Hulu cant generate a 35% yield per year based on the acquisition price, KKR will probably not increase the size of its bid. Deep value is private equity’s forte, not high growth, and Hulu may be more trouble than private equity thinks its worth.
Most likely contenders
Yahoo! Inc. (NASDAQ:YHOO) and Google Inc (NASDAQ:GOOG) are the most likely to buy Hulu. Currently, Yahoo! Inc. (NASDAQ:YHOO) is operating an acquisition-based business model, which is something I cover more thoroughly in an article I have recently written. Google Inc (NASDAQ:GOOG) could also be a contender, as it previously offered to buy the company just two years ago.
Yahoo! Inc. (NASDAQ:YHOO) still has $4.1 billion in short-term investments and cash on its balance sheet, and it is projected to generate around $1.25 billion in profit this year. So it can easily add to the size of its bid just from the income it generates from operations. Yahoo! may crank up the size of its bid to push private equity and cable operators out of the room.
Some say Yahoo! needs this deal with Hulu, as it doesn’t own a truly compelling web property in the video space. Thus far, creating video streaming under the Yahoo! Inc. (NASDAQ:YHOO) umbrella has been unsuccessful, as Yahoo! Screen has failed to garner a substantial user base. Yahoo! is fairly compatible with Hulu, and it’s highly probable Hulu’s management would like a deal with Yahoo!.
And then there’s Google Inc (NASDAQ:GOOG). Google wouldn’t mind adding to its market position in video streaming. The company is offering better compensation practices for individual studios on its YouTube channel platform, and the purchase of Hulu would nicely tie into that. Think about it; Hulu is a paid for content streaming service that could eventually buy content from YouTube and its various channels. This could lead to even better content going forward.
For now, Google Inc (NASDAQ:GOOG)’s YouTube channels are priced at $1.99 a month which makes them competitive with both Hulu and Netflix. These same channels will also be able to monetize through advertising. And while the success of this strategy is yet to be determined, Google remains interested in Hulu. And with $50 billion in short term assets, it has the cash to pull a deal off without a hitch.
Conclusion
Of all the companies mentioned, Yahoo! Inc. (NASDAQ:YHOO) and Google Inc (NASDAQ:GOOG) seem to be the best fit for Hulu. If Yahoo! were to succeed in acquiring Hulu, it would be Marissa Mayer’s best acquisition to date as it gives the company a real foothold in paid-for content streaming. Likewise, a match with Google would give it a turnkey paid for content streaming channel that could eventually surpass YouTube.
The article Who Will Buy Hulu? originally appeared on Fool.com and is written by Alexander Cho.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Google and Walt Disney. The Motley Fool owns shares of Google and Walt Disney. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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