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Yahoo! Inc. (YHOO): Here’s One Other Company It Should Buy

Core business has not seen growth for years. Armed with a lot of cash, the company is on the look out for new sources of revenue growth. Rising video streaming company, Hulu, LLC fits the bill perfectly as Yahoo! Inc. (NASDAQ:YHOO)! seeks to ramp up its revenue from video ads. After the failure to buyout the French video site, Dailymotion, the company should go after Hulu, as its owners are in strategic discussions about the future.

Yahoo! Inc. (YHOO)Hulu’s business model, which includes a mix of subscription revenue from users as well as advertising revenue from basic video offerings, would be a big plus for Yahoo! Inc. (NASDAQ:YHOO), as it seeks to keep up with Google Inc (NASDAQ:GOOG)’s YouTube and also have a strong presence in the trend towards “over-the-top” video consumption.

Hulu’s owners and management are not in harmony, as the company’s co-founder left the company. Hulu is owned by The Walt Disney Company (NYSE:DIS), Comcast Corporation (NASDAQ:CMCSA) and News Corp (NASDAQ:NWSA). Comcast Corporation (NASDAQ:CMCSA)’s NBC remains a silent partner, whereas, News Corp (NASDAQ:NWSA). and Disney are still evaluating the company’s forward strategy and how to monetize this rapidly growing asset. And the two media giants are trying to figure out whether to keep Hulu as an ad-supported business model or purely run on subscriptions.

The Walt Disney Company (NYSE:DIS)’s ABC unit owns 32% of Hulu, and accounts for its investment as an equity-method investment, but will likely consider buying out its other partners and convert the asset into a subsidiary. ABC already provides a wide range of shows on Hulu’s site on the next day, and complete ownership will aid Disney’s massive entertainment portfolio to be even stronger.

In addition, market speculation is high with numerous sources stating that other leading companies like Amazon.com, Inc. (NASDAQ:AMZN) and Time Warner Inc (NYSE:TWX) also considering potential bids on Hulu. Also, Google previously wanted to acquire Hulu as well. Yahoo! Inc. (NASDAQ:YHOO) can acquire Hulu and keep the rapidly growing asset away from competitors, while simultaneously growing its revenue base from the current levels

Hulu has been growing its paid subscriber base rapidly. The company added ~1 million subscribers in Q1 2013, and now has more than 4 million subscribers for the ad-supported premium service, Hulu Plus. The company doubled its sub base in 2012, and ended the previous year with a little over 3 million subs. While Hulu still trails the Internet streaming giant, Netflix, Inc. (NASDAQ:NFLX), the company is making strides towards reaching Netflix, Inc. (NASDAQ:NFLX)’s global subscriber base of more than 36 million.

Hulu’s content base keeps on increasing with more than 70,000 titles from more than 450 content partners. Hulu is getting traction in its video advertising service as it has the highest engagement among leading ad-supported sites, according to comScore. Hulu boasts of having more than 1,000 advertisers portraying online video ads on its platform. And in addition, usage of Hulu on mobile is on the rise, with the company’s acting CEO, Andy Forssell stating the company is expecting 15% of video consumption on mobile devices.

Hulu earned revenue of ~$700 million last year, and with increased paid subscribers and more online video advertisers as well as solid mobile viewing, the company’s revenue should see strong growth in 2013. Yahoo! Inc. (NASDAQ:YHOO) position on mobile is not solid, and is much lower compared to the company’s lead rivals, Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB).

Hulu is in the same boat as other “over-the-top” services like Netflix and Amazon.com, Inc. (NASDAQ:AMZN), and is also producing its own original content shows. Hulu will be releasing 3 new original shows in the summer, and also the company has a number of exclusive shows that will air. Hulu is unlikely to spend hundreds of millions of dollars like Netflix did on high quality shows with House of Cards and Arrested Development, the company will be trying to hold onto its subscriber base of premium users and try to limit the churn rate with the release of original shows.

Hulu is unlikely to reach Netflix’s subscriber base, but the company is in a solid position in the Internet streaming space. Hulu’s original content production might entice current viewers of its free service to pick-up a paid subscription of Hulu Plus of only $8. Hulu is a major outlet for numerous content creators and broadcast networks including Disney’s ABC, NBC, FOX and Univision to distribute their video offerings, and is likely to be of more importance down the road.

Yahoo! Inc. (NASDAQ:YHOO)’s core business of display and search is losing a lot of ground to Internet heavyweights, Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB), and the company should reasonably go after Hulu. Yahoo! Inc. (NASDAQ:YHOO)’s CEO is a former Google Inc (NASDAQ:GOOG) executive and likely has a very good understanding of Google Inc (NASDAQ:GOOG)’s YouTube business, which should enable the smooth running of Hulu’s operations after an acquisition.

Yahoo! is seeking out newer sources of inorganic growth for the company, as the company has been acquiring numerous small companies to enhance its content offerings.

Based on Hulu’s rapidly growing trajectory of subscriber base, content partners, as well as advertising partners, the video streaming company would be an excellent acquisition for Yahoo.

Hulu’s management bought back 10% of its equity from a former owner at a valuation of ~$2 billion in Oct-2012. And if Yahoo! wants to bid for Hulu, the company will likely have to pay a sizable premium from that level, as Hulu managed to grow its paid subscriber base substantially from 4Q2012. Yahoo! can easily layout $3.0-$3.5 billion for an acquisition of Hulu by using a higher mix of stock in the equation.

Yahoo’s stock is up ~35% YTD, and is close to 5-year highs. With such renewed optimism around the stock, primarily due to the surging value of AliBaba, Yahoo! can easily fund a big transaction with more stock. In addition, Yahoo! also has a sizable cash hoard of ~$5.4 billion as well, despite the company’s share repurchases in the first quarter 2013 totaling $775 million.

It remains uncertain whether Yahoo! will bid for Hulu, as other bigger rivals including Time Warner Inc (NYSE:TWX) and Amazon enter the picture, along with the existing owners, Disney and News Corp. deciding the company’s future. Yahoo! should make a sizable bid for Hulu, and gain a tremendous and fast growing asset, which lays the foundation for growing streams of revenue from both online video advertising as well as paid subscriptions.

The article Yahoo! Should Acquire Hulu originally appeared on Fool.com and is written by Ishfaque Faruk.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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