Shares of Shutterfly, Inc. (SFLY) plunged 11.8% in the trading session on Monday and dropped to a 4-month low after private equity firm – Silver Lake Partners LP – reportedly failed to reach a deal to acquire and combine Shutterfly and Snapfish, owned by Hewlett-Packard Company (HPQ). Silver Lake missed the Oct 10, 2014 deadline for the acquisition.
Silver Lake reportedly intended to pay more than $2 billion for the deal. Combining the two digital-photo storage and printing sites would have boosted the combined company’s scale and product offerings. It would also have removed a competitor in the intensely competitive space.
However, reports state that Silver Lake might still show interest in a deal with Shutterfly. We believe Shutterfly is an attractive acquisition target for 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.
Shutterfly has been looking for a buyer for some time now and reportedly hired boutique investment bank Qatalyst Partners LLC in July. (Read: Shutterfly Seeks a Buyer, Shares Jump 15.0%). The decision to sell the company comes in the wake of back-to-back losses incurred in the first two quarters of 2014.
Apart from this, the termination of the partnership with Costco Wholesale Corporation (COST) in 2013 affected Shutterfly’s profits to a great extent. Also, depreciation, labor and equipment costs for expansion and acquisition of manufacturing facilities dented profitability. In fact, the company expects the bottom line for 2014 to range within a loss of 11 cents to earnings of 20 cents, compared with earnings of 38 cents in 2013.
Moreover, Shutterfly faces stiff competition from major tech players such as Google Inc. and Facebook, Inc. (FB) that have been acquiring photo-sharing companies in the technology and Internet space. These companies have better and effective resources and are therefore eating into Shutterfly’s market share.
Shutterfly, currently, has a Zacks Rank #3 (Hold).
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