Following yesterday’s rumours, the LA Times is now reporting that Hulu has hired two investment banks, Guggenheim Partners and Morgan Stanley, to explore a potential sale. As I described inHere’s Why Any Deal For Hulu Is Unlikely, the banks have their work cut out for them. The critical issue is that Hulu’s main asset – exclusive next-day distribution rights to 3 of the 4 broadcast TV networks’ programs (ABC, FOX and NBC) – will be at the heart of Hulu’s valuation. (Note that just 6 months ago Hulu’s plan to go public was undermined by these same rights not being viewed as sufficiently long-term).
To the extent that the rights get diluted (e.g. become non-exclusive, limit monetization opportunities, delay program release windows, reduce the number of programs, etc.), acquirers will ratchet down their valuations accordingly. And this is where the banks’ task will become especially complicated; each of the networks’ owners (Disney, News Corp. and Comcast) has very different strategic objectives which are further clouded by all the uncertainty that online and mobile video has created. Pinning down if and how they would work with each specific bidder will be quite the Rubik’s cube exercise.
Though Variety is reporting this afternoon that Fox has a handshake deal to renew its distribution rights (a tidbit likely leaked by Fox itself, which by definition makes it the owner most likely to be pushing the Hulu sale), nothing about the networks’ current distribution arrangements can be assumed to carry over to a new entity. No doubt there are “change of control” provisions in the licensing agreements so if Hulu were sold everything would be back on the table. This is particularly relevant for Comcast, which doesn’t have a board seat, but could use NBC distribution as a key bargaining chip to influence the process.
So now that the sale process is ready to start, it’s worth thinking about handicapping the potential bidders. Assuming some meaningful distribution arrangement can be concluded with the network owners, from my perspective, the three companies who would benefit most from Hulu’s content are Google, Netflix and Apple.
Google has long coveted premium content to complement YouTube and the pairing of the sites would dominate the market. Google clearly has the deepest pockets to bid aggressively and has been plenty willing to do so in past transactions (see the acquisition of YouTube itself). As long as the AdWords gusher keeps spouting cash, Google has an edge on everyone else.
Netflix would benefit equally well from Hulu’s content. The combination of Netflix’s valuable catalogue with Hulu’s next-day program availability would be nirvana for entertainment-oriented consumers and would immediately raise cord-shaving and cord-cutting concerns to a new level. Netflix would be a long shot for financial reasons alone as any deal would certainly be stock-heavy. With memories of the AOL-Time Warner debacle still fresh, Google’s cash will look a lot more attractive than Netflix’s rich stock (and also note Netflix isn’t an active M&A player).
The only real financial counter-weight to Google is Apple. It would be a massive left turn in Apple’s M.O. to make a content acquisition like this, but with its recent foray into the ad business, and rumours of an Apple-branded television set swirling, locking in high-profile content would be appealing. Then of course there’s the bitter Google rivalry as a motivator.
Beyond these three, others like Yahoo, Amazon, Comcast, Microsoft, Facebook, etc. could make a credible play, though the rationale or fit isn’t quite as good for any of them. But the main focus in any Hulu transaction will be the distribution rights and how the network owners’ decide to play their hands. As I said previously, it’s very hard for me to believe they’re going to give up a lot of control with so much current uncertainty. That reduces the odds of the owners agreeing on any one deal.
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