The Deal: Jumping Through The Hulu Hoop

NEW YORK ( The Deal) - It's hard to imagine an auction making as much noise or generating as much heat as the one about to end for Hulu LLC. Yet the auction's diverting asides have never repudiated the notion that the current field of Hulu contestants has just one logical buyer: Yahoo! Inc ( YHOO).

Let's begin with the assumption that Hulu's active owners -- Walt Disney Co.'s ( DIS) ABC and News Corp.'s ( NWSA) Fox, alongside passive owner Comcast Corp.'s ( CMCSA) NBCUniversal LLC -- really do follow through on a sale. That's hardly a foregone conclusion given that these same owners halted a Hulu auction in 2011 and pulled back from an initial public offering in 2010.

Those two false starts, however, suggest the third time will be the charm. Otherwise, on contemplating the fallout from a third failed attempt at changing Hulu ownership inside of four years, the operating metaphor would be "strike three!"

Let's also recognize Hulu's intrinsic appeal to strategic prospects, whether they're cable companies, satellite broadcasters, media consortia or Internet companies. The deep pockets therein, once coupled with the synergy or utility a sale would bring to any winner of this type, give these strategics the ability and the justification to offer more for Hulu than any financial sponsor could responsibly pay.

Doesn't even matter if a would-be financial sponsor teamed with a strategic, or something akin to a strategic, on meeting this week's deadline for final bids. The high internal rates of return demanded by private equity should be enough, ultimately, to keep financials suitors at bay.

Nonetheless, on leaving the field to strategics, it's important to note that they're not all the same. An important distinction, for example, is whether they already buy content from ABC, Fox and NBC. Cable companies and satellite broadcasters do buy such content, which means Hulu's sale to any of them would keep the number of content buyers in the sales universe of ABC, Fox and NBC exactly the same.

It also means Hulu's selling networks would render themselves vulnerable to two-for-one pricing demands from an existing content buyer who then begins negotiating for that same content, again, as Hulu's new owner. This process would be aggravated -- probably to the point of managerial paralysis, considering the inability of just ABC and Fox to agree on Hulu's direction -- if a consortium of content-buying distributors were able to mount a winning club bid.

Contrast this unwieldy proposition to a Hulu sale to Yahoo!, which would actually bring another buyer to the table for which content from ABC, Fox and NBC would forever thereafter be a must-have purchase. By selling to this buyer, in other words, Hulu's current owners would not only reap the benefits of a sale but simultaneously increase demand for their content.

Finally, despite all of its recent acquisitions, Yahoo! still has $5.4 billion in cash and marketable securities, with another $9 billion or so anticipated from its 23% remaining stake in IPO-pending Alibaba Group Holding Ltd. That's more than enough by far to effect a change of ownership at Hulu that, from a sellers' perspective, is clean, motivating and demand-increasing.

Written by Richard Morgan

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