Image source: The Motley Fool.
You haven't seen the last of DVD kiosk operator Redbox, but the days of its parent company, Outerwall (OUTR), as a publicly traded entity are numbered. Shares of Outerwall moved 11% higher yesterday after an the company announced that it will be acquired by Apollo Global Management.
The deal will cash out investors to the tune of $52 a share, valuing the company behind automated kiosks that rent discs, swap coins for gift certificates, and recycle consumer electronics gadgetry at a cool $1.6 billion. It's been four months since Outerwall began exploring strategic alternatives, so a buyout, in and of itself, isn't exactly a surprise.
The only real shocker is that someone believes that Outerwall -- and since Redbox accounts for nearly 80% of its revenue, we know what Apollo is buying -- is the kind of company that can be polished up as a private company, only to turn right back around and be worth more than Apollo's $1.6 billion purchase price. Redbox is a dying model, and it doesn't matter if Outerwall will benefit from not having to live up to financial expectations with every passing quarter by going private. The bottom line is that consumers aren't as interested in renting DVDs, Blu-ray discs, and video games the way they used to.
Herniated disc
There was a time when Outerwall's Redbox seemed to be Netflix's (NFLX -0.08%) biggest rival. Blockbuster and traditional brick-and-mortar rental shops were fading when Netflix was still relying on mail-delivered discs in red mailers to fuel its platform. Redbox offered around-the-clock convenience with nightly rentals for as little as a buck.
Then Netflix did the right thing. It disrupted its model by embracing streaming. However, there was a time when Redbox was gaining DVD-rental market share at the expense of a Netflix that was focusing its efforts on its digital catalog.
Both companies have been seeing their disc-based operations fade these days. Redbox loaned out 137.7 million discs in this year's first quarter, 20% below the prior year's volume. Meanwhile, Netflix's subscriber base continues to shrink, and is down to 4.5 million mail-tethered accounts as of the end of June. That is 15% below the 5.3 million DVD accounts it was servicing a year earlier. That base peaked a few years ago at three times that size.
If the last two places still offering DVD and Blu-ray rentals have experienced double-digit-percentage declines in popularity over the past year, what exactly is Apollo buying? There isn't going to be a revival in physical media. The future is digital, but Redbox fumbled the future. Redbox Instant was a flop. It rolled out too late as a hybrid subscription service that combined kiosk rentals with digital delivery. It launched in 2013 and was shuttered a year later. Redbox is now testing a new platform -- Redbox Digital -- but if it was too late three years ago, just imagine what its chances are to stand out this time.
The business is certainly still profitable, and Apollo can milk the cash cow in the near term. However, that cash-flow volume will shrink with every passing year until it dwindles down to nothing.
Outerwall was set to report quarterly results on Thursday, and this buyout obviously spares shareholders from having to put up with the ramifications of what was likely going to be another disappointing report. It's just another company that thought it could take on Netflix -- both in physical and digital delivery -- only to fall woefully short.
