Investors are hoping for a major deal to come from a potential Hulu buyout. Currently the three owners of Hulu are The Walt Disney Company (NYSE:DIS), Comcast Corporation (NASDAQ:CMCSA), and News Corp. Obviously, Disney, Comcast, and News Corp shareholders want the biggest bid possible, whereas Netflix, Inc. (NASDAQ:NFLX) may be put in a difficult competitive position depending on the new direction of Hulu. Yahoo! Inc. (NASDAQ:YHOO) and Google Inc (NASDAQ:GOOG) would be thrilled to add another company to their portfolio. They’ve both got plenty of cash to burn.
Disney is likely to benefit the most as it has a conflict of interest between owning Hulu and selling its content to Netflix, Inc. (NASDAQ:NFLX). Disney’s investment strategy is fairly simple: collect revenue from its digital media properties and reinvest it in theme parks and other properties. Netflix, Inc. (NASDAQ:NFLX) is expanding internationally and exposing Disney movies to larger audiences may help Disney build its in other parts of the world.
Who will buy Hulu?
Both The Walt Disney Company (NYSE:DIS) and News Corp disagree on how Hulu should be operated. Disney would like to sacrifice short term profitability in favor of a growing membership. News Corp prefers to monetize Hulu immediately. Both seem to have good intentions for the network, but the business interests do conflict, which is why its time to sell.
Comcast Corporation (NASDAQ:CMCSA) and News Corp will not want to sell Hulu to DIRECTV (NASDAQ:DTV), even though DirecTV has an offer on the table of $1 billion. Ownership is not anxious to give a competitor another monetization tool, so you should expect the offer from Time Warner Cable Inc (NYSE:TWC) to also be rejected.
Let’s not forget that Hulu’s management may feel uncomfortable with a bid from a cable company. Cable operators currently buy content directly from media companies. So any cable company that attempts to acquire Hulu would have to divvy up cash to buy content for both cable and web subscribers. It’s also possible that Hulu may become underfunded if a cable company had complete control of the company. Media streaming over the internet is in direct conflict with the legacy business of offering cable services for televisions.
Private equity isn’t the answer
There are various bids from private equity (KKR&Co, and Silver Lake Management), but even these companies will have trouble acquiring Hulu. The number of offers for Hulu is increasing, and bids are starting to reach over a $1 billion. The price is getting so high, private equity may find it difficult to compete. Generally, Private equity firms need to diversify holdings, and it’s doubtful any will over pay to get Hulu.
Kohlberg Kravis Roberts is the third most well capitalized among the private equity companies on the top twenty list, and it’s the most well-funded private equity bidder amongst the bidders for Hulu. But if Hulu cant generate a 35% yield per year based on the acquisition price, KKR will probably not increase the size of its bid. Deep value is private equity’s forte, not high growth, and Hulu may be more trouble than private equity thinks its worth.