Hulu Seen at 50 Times Earnings With Netflix Multiple: Real M&A

Hulu LLC's website is shown in this screen grab. Photographer: Hulu via Bloomberg

Hulu LLC may cost potential buyers from Yahoo! Inc. to Inc. as much as 50 times earnings for a chance at owning what may be the next Netflix Inc.

Hulu’s board, which includes News Corp. and Walt Disney Co., is considering a sale of the video-streaming service after being approached by a possible acquirer, a person familiar with the matter said this week. With Netflix, the mail order and online movie-rental service, valued at 49.6 times this year’s earnings, Hulu’s price tag could exceed $2 billion, according to data compiled by Bloomberg and SNL Kagan.

While Hulu may help boost Yahoo’s advertising revenue and give Amazon an online-video service to compete with Netflix, acquirers face higher costs to buy rights to stream television shows that existing owners currently provide, Benchmark Co. said. Hulu, which didn’t go forward with an initial public offering that may have given it $2 billion in market value, said it will exceed 1 million paying users and have $500 million in total sales this year. That’s dwarfed by Netflix, which has 23 million customers and may generate six times as much in revenue.

“Anyone of size trying to build an online content business would likely be interested in Hulu,” said Clayton Moran, an analyst with Benchmark in Boca Raton, Florida. “It makes sense that they’d be one of the interested parties,” he said of Yahoo and Amazon.

Still, “content costs will be a big issue. The content providers are now the owners of Hulu, so once they’re no longer the owners, content costs will go higher,” he said.

‘The Daily Show’

Elisa Schreiber, a spokeswoman for Los Angeles-based Hulu, declined to comment, as did Teri Everett, a spokeswoman for News Corp. in New York. Zenia Mucha, a spokeswoman for Burbank, California-based Disney, and Kathy Kelly-Brown of NBC Universal, which owns part of Hulu, didn’t return messages seeking comment.

Hulu, founded in 2007 by New York-based NBC Universal and News Corp.’s Fox as a way for TV networks to combat piracy, lets users watch movies and shows such as Fox’s “Glee,” Comedy Central’s “The Daily Show with Jon Stewart” and ABC’s “The Bachelorette” from computers for free with advertisements.

The website also introduced a $7.99-a-month subscription to Hulu Plus last year, offering access to a current season’s episodes of popular shows over the Internet, as well as on tablets, gaming consoles and Blu-ray players in high definition. The model puts Hulu in competition with Netflix.

Hulu’s Board

Providence Equity Partners invested $100 million when Hulu was introduced, and Disney joined as an owner in April 2009. Hulu’s board now includes Chief Executive Officer Jason Kilar and representatives from Disney, Providence and Rupert Murdoch’s News Corp., according to the company’s website.

Comcast Corp. of Philadelphia agreed to give up NBC Universal’s management control in Hulu to help gain approval in January for its purchase of a majority stake in NBC Universal.

While closely held Hulu has been approached about selling in the past, the company views the most recent overture as more serious, according to the person with knowledge of the situation, who wasn’t authorized to speak publicly. Hulu’s board hasn’t made a decision on whether to sell, the person said.

Yahoo of Sunnyvale, California, recently approached the company about a purchase, the Los Angeles Times said this week.

In a sale, Hulu’s owners would try to get the same valuation that Los Gatos, California-based Netflix commands from investors, according to David Joyce, a New York-based media analyst at Miller Tabak & Co.

Netflix Multiple

Netflix, which lets users view movies and TV programs over the Internet and rent DVDs for a monthly fee, has more than doubled in value in the past year as demand for online videos increased.

Its stock closed at $248.66 yesterday, or 49.6 times its comparable per-share earnings of about $5.02, according to analysts’ 2011 estimates compiled by Bloomberg. With Hulu projected to have a $45 million profit this year, according to research firm SNL Kagan, the video-streaming service would be worth $2.2 billion, the data show.

At that multiple, Hulu would be more expensive than 97 percent of companies in the Standard & Poor’s 500 Index, the benchmark gauge for American common equity. Companies in the S&P 500 are valued at 13 times this year’s profit, data compiled by Bloomberg show.

Hulu had been preparing an IPO that may have valued the company at more than $2 billion and was talking to investment banks about going public as early as 2010, a person with knowledge of the plan said last August.

‘Benchmark for Value’

Netflix is “what people point at as a benchmark for value,” said Tony Wible, an analyst at Janney Montgomery Scott LLC in Philadelphia. Hulu “has great brand recognition and a good level of website activity that can be monetized,” he said.

Yahoo, owner of the largest U.S. Internet portal, and Amazon, the world’s largest online retailer, are among companies that may be interested in acquiring Hulu, according to Ken Sena, an analyst at Evercore Partners Inc. in New York.

Yahoo’s advertising revenue fell 2 percent last year, lagging behind an average 15 percent increase for all online advertisers, Anthony DiClemente, a New York-based analyst at Barclays Plc, wrote in a report dated May 31.

The company, which has $2.8 billion in cash and short-term investments, has lost market share to Google Inc.’s YouTube and Facebook Inc. every year since 2008, he said. Its share will continue to shrink through 2015.

Buying Hulu would help Yahoo sell more ads by attracting a greater number of users to its site, said Paul Meeks, an analyst at Capstone Investments Inc. in Charleston, South Carolina.

Yahoo, Amazon

“It would make some sense to try to get an asset in which they can boost their display ads,” he said. “The company still generates a lot of cash. They have the financial wherewithal to pull it off.”

Dana Lengkeek, a spokeswoman at Yahoo, declined to comment.

Amazon’s CEO Jeff Bezos has been trying to add more digital entertainment services as Netflix, Hulu and Apple Inc., which distributes music, TV and movies through iTunes, have attracted an increasing number of users. In February, Amazon started offering an instant streaming service to Amazon Prime home-delivery customers, giving unlimited access to more than 6,000 movies and TV shows at no additional cost.

Bundling videos with its Amazon Prime service, which offers expedited shipping for $79 a year, could make Amazon Netflix’s biggest competitor, Barclays’ DiClemente said.

‘Can Make Sense’

For Amazon, “the issue is just getting more adoption,” said Evercore’s Sena. “They’re going to run up against the same content costs with or without Hulu. If Hulu can drive that distribution, it can make sense.”

Mary Osako, a spokeswoman at Seattle-based Amazon, didn’t return a telephone call seeking comment.

While Hulu’s Kilar said in April the company will spend $300 million on content this year, the cost will probably increase for any new owner, according to Andy Hargreaves, an analyst at Pacific Crest Securities in Portland, Oregon.

“The key is you’re buying the company from what will become your primary suppliers, so you’ve got to figure out what they’re going to charge you,” he said. “Those companies committed to contributing content in exchange for equity. Once they don’t have equity anymore, they’re going to contribute content in exchange for cash.”

An acquirer of Hulu would also compete with cable distributors, advertisers on broadcast TV, Netflix and Apple’s iTunes, which are negotiating deals with the same content providers, according to Janney’s Wible.

For Steve Beck, a managing partner at New York-based management consultancy Cg42 LLC, the opportunity to secure the rights to re-broadcast popular TV shows from “South Park” to “House” over the Internet may be worth the risk for companies willing to bid for Hulu.

“It wouldn’t surprise me suitors are significantly interested,” said Beck, whose firm counts Microsoft Corp. as a client. “Hulu has online rights to shows the day after they air. That’s extremely valuable. Not even Netflix has that.”

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