Bloomberg News

Hulu Bidders Bring Range of Strategies to Takeover Fight

June 04, 2013

Hulu Bidding Free-for-All Presents Seven Clashing Visions

For now, Los Angeles-based Hulu serves as a way for people to watch network-TV shows and other programs over the Internet - a popular option among so-called cord cutters, people who have dropped their cable or satellite subscriptions. Photographer: Scott Eells/Bloomberg

At least seven bidders are said to be interested in acquiring Hulu LLC, and their divergent motivations in pursuing the deal could end up radically altering the strategy of the online-television service.

Two private-equity firms, a media mogul, the second- and fourth-largest U.S. pay TV operators, Internet company Yahoo! Inc. (YHOO:US), and the owner of the Hollywood Reporter and Dick Clark Productions all submitted first-round offers to purchase Hulu, according to people familiar with the matter. The company is owned by Walt Disney Co., News Corp. and Comcast Corp. (CMCSA:US)

DirecTV (DTV:US) is one of at least three bidders offering $1 billion or more for Hulu, people with knowledge of the process said last week. Depending on who buys it, Hulu could serve as a bet on the future of mobile video or a home for original content, said Rich Greenfield, an analyst at BTIG LLC.

“Hulu is of interest to many,” Greenfield, who is based in New York, said in an interview. “The question is: How can Hulu be used for far more than what it’s being used for today?”

For now, Los Angeles-based Hulu serves as a way for people to watch network-TV shows and other programs over the Internet - - a popular option among so-called cord cutters, people who have dropped their cable or satellite subscriptions. The idea was to let Disney’s ABC, Comcast’s NBC and News Corp.’s Fox benefit from online advertising, helping the broadcasters adjust to the Internet era. Hulu offers both a free version of the service and a $7.99-a-month option with greater access to shows. The number of paying customers topped 4 million last quarter.

Owners Disagree

Two of the three owners -- Disney and News Corp. -- have clashed over how to run Hulu, prompting them to put the business up for sale. Comcast, the third owner, is barred from an operational or board role under an agreement with regulators related to its NBC Universal acquisition in January 2011. The government was concerned Comcast’s position as a cable provider and programming owner would create conflicts of interest.

Since the bidding process for Hulu began this year, it has drawn a range of suitors. Private-equity firms KKR & Co. and Silver Lake Management LLC made separate offers, people with knowledge of the situation said last month. Silver Lake, based in Menlo Park, California, is working with William Morris Endeavor Entertainment LLC, the talent agency led by Ari Emanuel and Patrick Whitesell, according to two people who asked not to be named because the sale process isn’t public.

Programming Showcase

Silver Lake aims to use Hulu as a platform to expand William Morris’s content production, a new business for the agency, one of the people said. The service would give exposure to shows or movies that William Morris produces.

Kristi Huller, a spokeswoman for New York-based KKR, and Gemma Hart, a representative of Silver Lake, declined to comment, as did Meredith Kendall, a spokeswoman for Hulu.

A private-equity firm may have to invest at a loss in new original programming for two to four years before building an audience big enough to turn Hulu into a profitable company, said Jaison Blair, an analyst at Telsey Advisory Group in New York.

Hulu’s free, ad-supported business is already profitable, a person familiar with the matter said. Hulu Plus, its $7.99-a-month product, loses money, the person said. Even though it generates monthly subscriber fees, the paid service requires higher licensing payments to cover the more extensive content. Hulu Plus could be profitable in 18 months depending how it grows, the person said.

“A private-equity investor needs to look at this as an early-stage growth business with potentially a large market-share opportunity,” Blair said. “Anyone that’s looking at it has seen the way that Netflix and Amazon Prime have grown and have gravitated toward original content.”

‘Arrested Development’

Netflix Inc., which has more than 29 million U.S. subscribers, has purchased rights to air new episodes of shows such as “Arrested Development” and “House of Cards,” starring Kevin Spacey. Netflix shares have more than tripled over the past year, bolstered by its push into original programming. Amazon.com Inc.’s Prime service, meanwhile, is adding new shows as part of its Amazon Originals program.

The Chernin Group LLC, led by former News Corp. President and Chief Operating Officer Peter Chernin, bid at least $830 million for Hulu, including the assumption of $330 million in debt, people with knowledge of the situation said in April. The Santa Monica, California-based firm has produced films and shows such as “Rise of the Planet of the Apes” and “New Girl.” It has also backed startups such as Tumblr Inc. and Flipboard Inc.

‘Billion-Dollar Question’

Chernin, who helped start Hulu in 2007 and served on its board, might have the best combination of funding and knowledge of video distribution to transform the company into a true competitor to cable companies, Greenfield said. The Chernin Group has brought on Providence Equity Partners and Qatar Holding LLC as investors.

“Chernin may have the best chance at moving Hulu forward,” Greenfield said.

A spokesman for Chernin said he declined to comment.

Hulu could also become part of a growing media portfolio for Guggenheim Digital LLC and its affiliates, which own the Los Angeles Dodgers, the Hollywood Reporter and Dick Clark Productions. Guggenheim Digital Chief Executive Officer Ross Levinsohn considered buying Hulu when he was Yahoo’s executive vice president in 2011. When he took the job at Guggenheim earlier this year, the company vowed to find “new, groundbreaking investments.”

Cord Cutters

DirecTV, the second-largest U.S. pay TV provider, would use Hulu Plus as a promotional add-on and retention tool for its subscribers, according to two people familiar with the matter. The El Segundo, California-based company, which has more than 20 million subscribers, could offer Hulu Plus for a discount or for free to customers who threaten to leave, one person said.

The company would continue to offer Hulu Plus to all comers, not just DirecTV subscribers, the people said. By keeping the content available to everyone, DirecTV could hedge its subscription business by getting some revenue from customers who don’t want to pay almost $100 a month for TV, said Vijay Jayant, an analyst at ISI Group in New York.

“DirecTV is a one-trick pony right now as it primarily distributes linear video,” Jayant said. “It’s probably amongst the most at risk long term to cord cutting given the increasing price of TV. For them, it’s strategic to participate in the evolution of Internet video and to put their branding and muscle behind it.”

Pushing Broadband

Time Warner Cable -- the fourth-largest U.S. pay-TV operator, with about 12 million video customers -- would probably use Hulu Plus to promote its high-speed broadband product, said Amy Yong, an analyst at Macquarie Securities in New York. The New York-based company could bundle a subscription to Hulu Plus to new Internet subscribers, she said.

Both Time Warner Cable and DirecTV already buy content from News Corp., Disney and NBC Universal. That may help them obtain programming rights for Hulu Plus for longer periods of time than newcomers to the industry, she said.

Darris Gringeri, a DirecTV spokesman, and Justin Venech, a Time Warner Cable spokesman, declined to comment.

To avoid tangled alliances, Hulu’s board may be inclined to steer clear of a cable or satellite company, said David Bank, an analyst at RBC Capital Markets in New York.

“What the studios want is a third party to sell their content into,” Bank said in an interview on Bloomberg Radio.

That’s where Yahoo comes in. The Sunnyvale, California-based company has bid for Hulu as part of CEO Marissa Mayer’s effort to remake the former dot-com darling, a person familiar with the matter said last month. Yahoo agreed to spend $1.1 billion on the blogging network Tumblr last month, and it made a bid for 75 percent of France’s Dailymotion that stalled after regulators questioned the deal.

Sara Gorman, a spokeswoman for Yahoo, declined to comment on potential acquisitions.

Previous Auction

Hulu tried to sell itself two years ago and drew offers from Google Inc., Amazon, Yahoo and Dish Network Corp. in that process, people said at the time. The auction ended after Disney, News Corp. and Providence Equity Partners said they saw more strategic value in keeping the asset. Providence sold its 10 percent stake back to Hulu for $200 million in October.

“It is an incredibly valuable brand,” Bank said. “I don’t think we’ve seen a massive economic success yet, but from a branding perspective, it is arguably more valuable than any of the networks themselves.”

To contact the reporters on this story: Alex Sherman in New York at asherman6@bloomberg.net; Andy Fixmer in Los Angeles at afixmer@bloomberg.net; Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net; Anthony Palazzo at apalazzo@bloomberg.net; Thomas Giles at tgiles5@bloomberg.net


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