By Barry Randall Professional money managers, like investors everywhere, occasionally wake up to good news. In my case, I woke up on July 2 of this year to some very welcome news about one of our holdings, Shutterfly (SFLY), the Internet-based image publishing service. (Think holiday cards, family photos, and funny pet images.)
Detective workI thought you might find it interesting to see how we've handled a fluid and at-times bizarre situation. Feel free to pass judgment. Bloomberg reported back on July 2 that the web-based printing firm had hired the investment bank Qatalyst Partners to shop it around. Shutterfly stock immediately rose from around $43 per share to $50. Typically, news of a possible sale like this is leaked by the investment bank or the company itself as a strategy for determining a fair price for the company. Sometimes this occurs when the company being shopped around has attracted no interest, and the investment bank uses this strategy to make sure any potential buyers are aware of the situation. I believed, however, that Shutterfly had likely attracted some interest, so the leak of the information was being used to home in on an equitable price.
Mating danceThere were no guarantees that Shutterfly would find a buyer. Even if it did, there was no guarantee that the buyer would offer more than the $50 per share at which it was suddenly (and happily) trading. But by early July, Shutterfly was firing on all cylinders. With its prodigious cash flow and unique business model, it would be an accretive acquisition for many suitors. So we chose to hold on to our shares. On July 30, Shutterfly reported earnings for the second quarter that ended on June 30. They modestly beat expectations and offered in-line guidance for the third quarter. The stock rose about 4% the next day. This strengthened our conviction in holding on to the shares, even at the risk that a deal might not be consummated.
On August 14, TheStreet.com reported that several private equity firms, including TPG Capital and Carlyle Group, had either made private bids to Shutterfly's board or intend to do so.The source was the obligatory "people familiar with the situation." Which we believed was either Shutterfly itself or Qatalyst. With these leaks, the principals were clearly trying to log-roll a deal. And given Shutterfly's dominant position in its industry and its prodigious cash flow, a deal seemed very likely to happen. So we continued to wait. On September 5, Heath Terry, Goldman Sachs' Shutterfly analyst published a strangely elaborate analysis of Shutterfly in the context of an LBO takeout, presumably by a private equity firm. The bottom line: at a hypothetical $60/share takeout offer, the deal offered a stout 20% internal rate of return to the buyer. The implication: there was plenty of headroom for an offer in excess of $60.
Enter Silver LakeOn September 22, Briefing.com reported that Silicon Valley private equity powerhouse Silver Lake Partners was preparing a bid for Shutterfly. On Friday October 10, Bloomberg reported that Silver Lake Partners had "abandoned" an attempt to acquire Shutterfly, as well as competitor Snapfish, a division of Hewlett-Packard. In that story, another unidentified source said that, "Silver Lake was valuing Shutterfly at about 12 times its future earnings before interest, taxes, depreciation and amortization. That implied a purchase price of about $2.57 billion, based on estimates for 2015 EBITDA of $214 million, according to data compiled by Bloomberg." This dry bit of I-Banker-ese was actually a snarky swipe at Shutterfly's board: a market cap of $2.57 billion equated to over $66/share. Apparently, somebody wasn't impressed that Shutterfly had turned down an offer that was 55% higher than the stock had been trading on July 1. I can say that I certainly wasn't impressed either. During the time I've known Shutterfly's management, I've been impressed with their low-key demeanor and impressive operational execution.
Clown showIf in fact they did turn down a huge takeover premium, it would be a black mark against them. But the claim could also be an impulsive swipe by a banker that led the horse to water but couldn't get it to drink.
Maybe Shutterfly's board thought their investment banker would shop the firm discreetly, not counting on suddenly being paraded across the global auction block like a piece of Kobe beef.Or maybe, as they say at an auction, the money really wasn't "in the room" and Shutterfly's bankers were clumsily trying to hang a price tag on their client for the one or two people left in America who weren't yet aware of the clown show. The following Monday, SFLY shares fell 12%. As I type this in late October, SFLY shares are trading at about $43 per share - the same as on July 2 when this whole process started. We still hold our position. Do I regret how I've handled the Shutterfly situation? No, not really. In hindsight it's easy to say we should have taken the $50 and run. But there was ample evidence that a deal would be consummated at a price greater than $50/share. That may still happen. But so far, it's been a trick, not a treat. Shutterfly is still a great company, generating cash and taking share from off-line competitors. I believe we'll be rewarded for our ownership; that reward has simply moved back into the future. Cue the spooky music. Photo Credit: Pink Sherbet Photography via Flickr Creative Commons
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