California-based online digital photo storage and printing company Shutterfly, Inc. (SFLY) shares rose 5.5% in the trading session on Monday after market rumors emerged that private equity firm, Silver Lake Partners LP, is in advanced stages of talk to acquire the company.
Silver Lake will pay more than $50 a share for the deal, according to media reports. Shutterfly had reportedly attracted bids from a number of private equity firms, including Hellman & Friedman LLC and Bain Capital LLC.
Shutterfly's main business allows customers to store photos digitally and uses them for making printed albums, posters, coffee mugs and other products. Thus, the company was considering private-equity firms, e-Commerce companies and web storage businesses for a possible divestment.
Market rumors indicate that the photo storage company might be valued at roughly $2 billion. Shutterfly has been looking for a buyer for some time now and had reportedly hired boutique investment bank Qatalyst Partners LLC in July of this year. (Read: Shutterfly Seeks a Buyer, Shares Jump 15.0%)
We believe Shutterfly is principally attractive to private equity firms because of the massive inventory of Kodak Gallery images it bought in a bankruptcy auction from Eastman Kodak Co. in 2012. According to media reports, the deal added nearly nine billion images to Shutterfly's photo library.
The decision to sell the company comes in the wake of back-to-back losses incurred in the first two quarters of 2014.
Other than seasonality, its termination of the Costco (COST) partnership in 2013 affected Shutterfly’s profits to a great extent. Apart from this, depreciation, labor and equipment costs for expansion and acquisition of manufacturing facilities further dented profitability. In fact, the company expects the bottom line in the range of a loss of 11 cents to earnings of 20 cents for 2014, compared with earnings of 38 cents in 2013.
Moreover, the company faces stiff competition from major players such as Google (GOOGL) and Facebook, Inc. (FB) that have been acquiring companies in the technology and Internet space. These companies have better and effective resources to leverage these buyouts and would eventually eat into Shutterfly’s market share. Further, Hewlett-Packard Company’s (HPQ) Snapfish and Apple Inc.’s (AAPL) iPhoto make it difficult for Shutterfly to gain market share in a crowded industry.
Shutterfly, currently, has a Zacks Rank #3 (Hold).
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