Several sources with knowledge of the ongoing Hulu acquisition talks tell PandoDaily that a deal is imminent and that DirecTV is the likely victor. The acquisition price will be written with a “B,” according to our sources, but just barely.
It’s no secret that Hulu’s owners are seeking an acquirer for the premium streaming video on demand (SVOD) platform. Over the last several months reports have surfaced of bids from DirecTV, Time Warner Cable, Yahoo, KKR, Guggenheim Digital, The Chernin Group in partnership with AT&T, and Silverlake Partners in partnership with William Morris Endeavor Entertainment. To further muddy the waters, the company is being advised by Guggenheim Partners, a sister company to the above mentioned bidder.
The latest round of negotiations have ranged in price from half a billion to more than a billion dollars, with various deal structures, terms, and demands thrown around for good measure, and have been described, for the most part, as “preliminary” and “early staged.” This may no longer be the case, as our sources say that DirecTV is the clear frontrunner and that a deal is now in “very advanced stages” and should be expected to close before the end of the month.
As with any deal of this magnitude and complexity, there are no sure things until the ink hits the paper, the funds are wired into the appropriate bank accounts, and the Department of Justice gives the all clear. But why is DirectTV the natural acquirer for Hulu?
The answer can be broken down into two parts. First, DirecTV is one of a select few companies with the resources and wherewithal to absorb Hulu and retain or increase its value. Second, Hulu fills a gaping hole in DirecTV’s offering in a way that it would be hard pressed to achieve by other means.
On the first point, Hulu is a bit of a quagmire because its owners, Walt Disney Co., News Corp, and Comcast, are also its content partners. This means that its long term access to content becomes incredibly uncertain once the company is sold. When Hulu was on the block two years ago, the contemplated deal was said to include long-term exclusive content agreements with each of its sellers – accordingly it fetched offers as high as $2 billion from Dish, Yahoo, and Amazon, which were ultimately rejected. (Google actually bid $4 billion, but its offer came with special conditions that killed talks before they got started.) Today, these exclusive agreements are off the table, meaning that Hulu will lose its exclusive window for streaming NBC, Fox and ABC television content and the acquirer will be forced to negotiate go-forward content agreements like every other SVOD platform.
Due to their existing content licenses, multichannel video programming distributors (MVPDs) like DirectTV, Time Warner Cable, Verizon FIOS, and AT&T U-Verse are far better positioned than financial acquirers (private equity firms) or strategic acquirers (Yahoo). MVPDs currently write the biggest checks to Hollywood via their affiliate agreements, making them well-positioned to extend these rights on a non-exclusive basis.
Secondly, unlike Time Warner, Verizon, and AT&T, each of which have broadband and/or mobile carrier offerings, DirecTV lacks any significant online presence, making it the most highly incentivized of the group. As connected TVs and set top boxes become the norm, an MVPD without an online offering risks losing its subscribers’ attention, and, as a result, its relevancy as they head elsewhere to find the shows and movies they want. The more comfortable consumers grow in getting their video content online, the less lock in MVPDs have. The MVPD business is built on low churn and becomes significantly less attractive if this fact changes.
At the same time, an entire generation of consumers are demanding “TV everywhere” services. The biggest hurdle MVPDs face in delivering this is authentication – in other words, verifying the identity of the viewer and what content she is entitled to view. Incorporating Hulu Plus as a login credential would dramatically accelerate DirecTV’s efforts in this regard, not to mention raise awareness of DirecTV’s still nascent TV everywhere offering. The acquisition would also provide DirecTV with a channel to distribute original programming, should it choose to follow in Netflix’s footsteps and become a content creator.
Through the deal, DirecTV would acquire more than 4 million paying Hulu Plus subscribers, which generated $695 million in revenue in 2012 (including ad revenue), meaning that the deal looks to be valued at less than two times revenue, although existing debt is also a factor. These viewers consumed 1 billion videos in Q1 of this year, with 24 billion minutes of usage last month and an average session time of 45 minutes. DirecTV should crawl through broken glass for the opportunity to pay up for this level of online and mobile engagement.
A natural argument against the deal is to suggest that DirecTV could build a Hulu competitor, rather than spending the money to acquire one. But this dramatically oversimplifies such a task. In Hulu, DirecTV, or any acquirer, gets a ready-made technology platform, a team experienced in delivering streaming digital video content at scale, and an existing digital audience at scale. There’s no guarantee that DirecTV could duplicate this foundation, regardless of the time or financial commitment it made. The company is years late to the game, and the market is already fragmented enough with subscribers forced to choose among Hulu, Netflix, and Amazon streaming services.
Finally, Hulu offers DirecTV a brand that consumers associate with premium video streaming. It is difficult to build a brand and to change consumer behavior. Today, when people think of DirecTV, they think of satellite TV (and thus, ugly rooftop satellite dishes), but not online or mobile video. The same is true, to varying extents, of all MVPDs. In online video the only names that matter are Hulu, Netflix, and Amazon, although YouTube and possibly iTunes could be considered dark horses. Not only would acquiring Hulu be a value add to DirecTV, but it would be a wise defensive move to keep it out of the hands of its direct competitors.
For Hulu’s owners, now looks like the time to sell. The media giants are unlikely to get the $2 billion plus figures that were floated last year when the prospect of exclusive licenses were still on the table. But, nothing beats a contentious auction to bump up the price of a rare asset. At the same time, Hulu has seen a significant brain drain in recent months, losing its CEO Jason Kilar, CTO Richard Tom, and VP of Product Robert Wong in short succession following an employee liquidity event triggered by Providence Equity Partners selling its minority stake in the company – approximately 10 percent – last October at an implied valuation of $2 billion.
With key talent heading for the exits, Disney and News Corp would be wise to strike while the iron is hot. (Comcast doesn’t get a vote due to regulatory concessions made during its acquisition of NBC-Universal.) The sellers are also likely to get the best price from a media company or strategic acquirer, rather than a financial buyer.
The stars all seem to line up for the DirecTV acquisition, but it’s still premature to consider the deal a foregone conclusion. There are a number of ways this could go, including the satellite TV operator getting outbid, partnering with a financial acquirer to obtain a minority stake in the company, or deciding (foolishly in my opinion) to build it themselves. But the most logical one is for DirecTV to get its hands on Hulu.
There are major shifts happening in the world of video consumption. Companies that can adapt have a chance to remain relevant through the next cycle. Those that can’t may not be around long enough to get a second chance. For DirecTV, the Hulu transaction is an opportunity to decide in which camp it will fall.
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