Hulu owners may seek IPO for video website after halting auction

Posted 10/17/11

LOS ANGELES - Hulu LLC’s owners may reconsider an initial public offering of the online video-streaming website after deciding to cancel an auction.

A share sale would let Hulu, owned by News Corp., Walt Disney Co. and Providence Equity Partners, raise capital to add content and help retain senior management, said Laura Martin, a Needham & Co. analyst in Pasadena, Calif.

Cash from an IPO would help Hulu compete with Netflix Inc. and Inc. for programming, Martin said. The service dropped plans for an IPO last year that envisioned a $2 billion value. By keeping Hulu, the media companies retain control over how shows are distributed online and can use the service to steer viewers to their networks, Fox, NBC and ABC.

“Are the owners willing to fund that themselves, which is a less expensive source of capital but comes with more risk?” Martin said in an interview. “Or will they turn to the public markets, that’s the question.”

CEO Jason Kilar angered some of Hulu’s owners in February by suggesting online ads are superior to traditional TV marketing. Kilar wants to be CEO of a public company, Martin said.

“If the owners commit to an IPO in the next two years, markets permitting, I think they will be able to keep Jason Kilar,” Martin said. “If not, I think they could lose him.”

The end of the auction also may lead to conversations about buying out stakes in Hulu held by Kilar and other members of senior management, the Wall Street Journal reported, citing a person familiar with the matter.

‘Compelling Value’

Hulu’s owners and management, in calling off the sale Thursday, said in a statement they will map out a future for the online service, citing its “unique and compelling strategic value.”

Elisa Schreiber, a spokeswoman for Los Angeles-based Hulu, wouldn’t comment beyond the statement. NBC Universal, also a co-owner of Hulu, was required to give up oversight when it was acquired by Comcast Corp.

With rival Netflix trying to contain a subscriber backlash over a price increase, Hulu is positioned to win users, said David Bank, an analyst with RBC Capital Markets in New York.

Hulu offers free and paid services. The $7.99-a-month Hulu Plus has more than 1 million subscribers, Kilar said in an Oct. 5 blog post. Hulu expanded to Japan on Sept. 1 and has added to the number of devices using Google Inc.’s Android software that can access its premium service.

Content Control

“The media companies are really wise for terminating the process,” Bank said. “They are making a very smart move to leave their content in their own hands and not leave their destiny to a third party.”

Hulu drew offers from Google Inc., Inc., Yahoo Inc. and Dish Network Corp., people familiar with the matter said last month. Dish, which has started a Blockbuster-branded online streaming service, bid $1.9 billion, one person said.

Marc Lumpkin, a spokesman for Englewood, Colo.-based Dish, declined to comment.

When Hulu was put up for sale in June, its price tag was estimated to be $2 billion or more, based on data compiled then by Bloomberg and SNL Kagan.

Netflix, Hulu’s larger rival in online streaming, has fallen more than 50 percent since the Hulu sale plan was reported in June.

Last week Netflix reversed a decision to separate its streaming and DVD-by-mail business, which was to be renamed Qwikster. Analysts said Netflix, which cut its third-quarter subscriber projection by 1 million on Sept. 15, changed its plans to stem customer losses.

“Netflix is in less of a position to pay Hulu’s owners for content,” Martin said. “It’s probably in their best interest to hold onto Hulu as a way to monetize their content.”

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