Within the last week, various news outlets have reported that online television streaming service Hulu has put itself up for sale, with further rhetoric suggesting that a deal in the $2.0 billion range is imminent.
Hulu offers ad-supported on demand streaming video of TV shows, movies and, webisodes from NBC, Fox, ABC, and many other networks and studios. Hulu is a joint venture of NBCUniversal, Fox Entertainment Group and Disney-ABC Television Group.
Walt Disney (NYSE:DIS), which owns 30 percent of Hulu, may be having second thoughts in selling its stake in the video streaming website. NBC Universal has 30 percent, News Corp. (NASDAQ:NWS) owns yet another 30 percent, and Providence Equity Partners holds the balance 10 percent stake in Hulu.
However, while Disney could easily extricate itself from various conflicts of interest associated with its 30 percent percent Hulu ownership, we believe DIisney is having second thoughts concerning unloading Hulu to a strategic owner, and could merely end up retaining its stake and continuing to nurture the service, Caris analyst David Miller wrote in a note to clients.
Of course, Providence Equity Partners, being merely a financial sponsor rather than a strategic owner, is rumored to favor a sale, which would allow the buyout firm to bank roughly an 18 percent internal rate of return (IRR) after establishing its initial stake 3 years ago.
However, Hulu in the hands of a large-cap technology concern with a fledgling media focus, such as Microsoft (NASDAQ:MSFT), Yahoo (NASDAQ:YHOO) or AOL (NYSE:AOL), would present Disney and its other 2 content-focused partners with two glaring problems.
First, any non-Studio-based entity owning Hulu is going to ask for exclusive streaming rights when renegotiating content licensing deals.
Disney, and particularly NBC Universal, due to its 51 percent ownership by Comcast, will be reticent to agree to exclusive deals as such a move would blatantly anger those company's multiple cable system operator partners, who pay the Big-6 media set $30.5 billion per year in affiliate fees for the rights to first-run content.
Secondly, if a deal does become reality, and Disney refuses to offer content exclusively, but other Studio-based entities do, then it risks seeing competing content promoted over its content, not a position Disney wants to see either.
On the other hand, there are a number of advantages Disney could realize by walking away from Hulu.
Miller said a terminal value, for sake of argument in the $2.0 billion range, would allow Disney to bank a handsome, one-time, after-tax gain of about $480 million, or 25 cents a share.
Disney could also extricate itself from a myriad of testy relationships, including that of Hulu CEO Jason Kilar, who we believe constantly butts heads with his content partners over terms of licensing deals, and the availability of certain episodic content, Miller wrote
Walking away from Hulu would also allow Disney to continue nurturing its brand new relationship with NetFlix (NASDAQ:NFLX), which now streams certain ABC/ABC Family content in a deal struck in December of last year.
Miller has an above average rating and $45 price target on Disney stock.