Hulu’s Owners Call Off Auction, Plan to Invest $750 Million

Hulu LLC owners Walt Disney Co., Comcast Corp.’s NBCUniversal and Rupert Murdoch’s 21st Century Fox Inc. called off their sale of the video-streaming service and will instead invest $750 million in the company.

The decision ends an auction that attracted bids from suitors including DirecTV, Time Warner Cable Inc., and Peter Chernin with AT&T Inc., people with knowledge of the matter said. The owners announced their decision in a statement today.

The growing popularity of streaming companies like Netflix Inc. and Hulu persuaded the owners, all producers of film and TV, to keep the fast-growing service. Hulu has 30 million unique monthly visitors, annual revenue that doubled to $690 million last year and more than 4 million paying subscribers. Disney Chairman and Chief Executive Officer Robert Iger ruled out another auction.

“We ultimately concluded that, even though we had some very compelling offers on the table, the future of Hulu is bright,” Iger said today at the Allen & Co. conference in Sun Valley, Idaho. “And if the future of Hulu is bright we should hold on to it.”

Throughout the auction that started in March, Hulu’s owners continued to weigh the value of the service and its long-term potential, Iger said. During that process, Disney and Fox overcame disagreements about Hulu’s direction.

“This had nothing to do with the offers that were on the table -- they were actually quite compelling,” Iger said. “But, again, when we compared them with what we saw the potential of what Hulu could be, particularly because we were aligned in vision, it was smarter for the shareholders of our companies for us to stay in.”

Cash Infusion

The cash will allow Hulu to buy additional programming and compete for subscribers with Netflix and Inc. Hulu offers a free version on computers and an $8-a-month Hulu Plus with more content on more devices. Shows on both have commercials. Hulu will also use the cash to attract and retain employees, develop new technology and for marketing, Iger said.

“We also decided we would infuse it with the kind of capital necessary to grow it significantly and aggressively,” Iger said.

Justin Venech, a spokesman for New York-based Time Warner Cable, declined to comment, as did Robert Mercer, with El Segundo, California-based DirecTV, the largest U.S. satellite TV service. Charles Sipkins, a spokesman for Chernin, also declined to comment.

The Bidders

DirecTV, the biggest U.S. satellite TV service, and the partnership of Chernin and AT&T each offered about $1 billion for Hulu, people with knowledge of the bids said this week. Time Warner Cable, the second-biggest U.S. cable system, sought to become an investor with Hulu’s owners, they said.

Hulu would have given pay-television providers the ability to offer a lower-priced alternative to their own cable and satellite video subscriptions. Online services are popular with people who cancel or cut back on pay-TV services, along with younger viewers who have never subscribed to pay TV.

“Hulu has an incredible set of apps and distribution that the networks just can’t duplicate, it never made sense to sell to a distributor,” said Rich Greenfield, an analyst with BTIG LLC. “We are very pleased and advocated the owners hold onto Hulu from the very beginning.”

Hulu Finances

Hulu’s free, ad-supported business is already profitable, a person familiar with the matter said last month. Hulu Plus, the paid product, loses money, the person said. Even though it generates monthly subscriber fees, the paid service has higher content costs. Hulu Plus could be profitable in 18 months depending on how it grows, the person said.

The canceled auction wasn’t the first time Hulu’s owners had a change of heart. They put the site up for sale in June 2011 and called it off in October. Hulu never advanced a planned share sale in 2010 that envisioned a $2 billion value.

The current auction stemmed from disagreements over Hulu’s direction between Disney and Fox, which control the company, and had each considered buying the other out. Comcast is barred from an operational role because of conditions placed on its purchase of NBCUniversal.

Disney, based in Burbank, California, rose 0.6 percent to $66.95 at the close in New York. Comcast, based in Philadelphia, slid 0.5 percent to $44.68, while New York-based 21st Century Fox advanced 0.8 percent to $30.19.

Time Warner Cable, the second-largest U.S. cable TV company, fell 0.2 percent to $115.16. DirecTV gained 0.8 percent to $64.91, while AT&T, based in Dallas, retreated 0.2 percent to $35.81.

DirecTV ‘Setback’

“It’s a setback psychologically for DirecTV,” said Todd Lowenstein, portfolio manager with Highmark Capital Management in Los Angeles, which owns 91,325 shares. “Hulu represents a clear path to a future that makes DirecTV viable in a new, mobile media landscape. These are scarce assets. When that option is removed, the attractiveness of DirecTV in some investors’ eyes is diminished.”

Suitors this time around were forced to weigh possible restrictions on future streaming rights.

Michael Eisner, former chairman of Disney, predicted this week that a buyer would lose next-day rights to television shows that the service now enjoys.

“If it is bought by a content-oriented production kind of company, it will then move from a company that is basically repeat broadcasting to original broadcasting,” Eisner, 71, said at Allen & Co.’s conference in Sun Valley, Idaho. “That is very expensive.”

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