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Going private is a temptation for any company that feels it isn't getting enough respect from the stock market. This might just be the case with Coinstar (Nasdaq: CSTR ) , the operator of the ubiquitous Redbox DVD rental kiosks fronting supermarkets and convenience stores throughout America. Published reports have it that the firm is in talks regarding a sale, most likely to a private equity group. Leading to the question: Would this be a boon or a bust for shareholders?
Breaking out of the box
It's not easy being Coinstar. Nearly all of the stock's value is tied up in the performance of Redbox, which accounted for around 86% of company revenues in its second quarter. This is a problem because investors consider the service to be behind the technology curve. It's hard to argue against that. The DVD format has been around for a decade and a half.
Streaming services, meanwhile, are the hot item offered by seemingly every company even vaguely involved in media. Witness, for example, the efforts by Amazon.com (Nasdaq: AMZN ) to draft shoppers to its online movie/TV service.
Coinstar's trying to break away from its DVD kiosks. It's creating a video-on-demand service in partnership with mobile and TV provider Verizon (NYSE: VZ ) , to be called Redbox Instant.
Coinstar seems to have a knack for sniffing out mass consumer tastes. In partnership with Starbucks (Nasdaq: SBUX ) , it's aiming to build a Redbox-like network of coffee vending machines located in and near heavily trafficked retail stores.
Not pretty enough
However, despite these initiatives with solid, big-name brands, Coinstar is so heavily identified with the fading business of DVD rental that any shift in strategy is probably not going to impress the market. What's compounded this recently is the company's 2Q results, which slid compared to 1Q, although they represented a year-over-year improvement and were broadly in line with expectations.
An unforgiving market traded the stock down by $8, or 15%, the day after the results were released.
The punishment isn't necessarily unfair. Coinstar is not doing badly in terms of financials, despite the creakiness of the technology it still heavily relies on. But for a company like this to go anywhere in terms of share price it really needs to blow the market away with the financials it posts or the deals it signs.
It hasn't done either. Continued growth doesn't put Coinstar anywhere near Netflix (Nasdaq: NFLX ) in terms of market strength and overall reach. Since the latter company is becoming more and more weighted toward streaming, all it needs is a good set of Internet pipes to grow its business. This is one key reason why it's had success recently expanding into technologically advanced markets like the United Kingdom and Ireland. Since launch of the firm's streaming service this past January, 1 million people in the two nations have already signed up as customers.
Coinstar, on the other hand, is hobbled by the physicality of Redbox's kiosks. The day-late-and-dollar-short streaming effort with Verizon won't alleviate this much. Redbox Instant is to be accessible only by subscribers of Verizon's FiOS fiber optic service. At the moment, that only amounts to 5.1 million people, while Netflix's streaming customers number 27 million.
And don't forget Amazon. It's relatively early days for that company's streaming, but the popular retail website has 152 million active customer accounts, and that doesn't count the more casual shoppers. Even if it only converted a fraction of these clients to streaming subscribers, that total number would still be considerable. And it would eat market share from the competition.
Also, FiOS is based exclusively in the U.S. Since Netflix and Amazon and most of their streaming ilk are Web-based, they have a clear advantage as far as international (and for that matter, domestic) expansion is concerned.
Coinstar's initiative with Starbucks is a clever and sensible move by a management team that seems to know what it's doing. Looking more closely at that business, though, brings up questions about its potential. Yes, the entire universe loves Starbucks, but does that necessarily mean that each CoinBucks (or whatever it's called) kiosk will have a line of coffee addicts sacrificing their pocket change for a drink?
Consider that Starbucks already has thousands of outlets in the United States. In many of our denser cities it's hard to walk three blocks in any direction without encountering one of the company's stores. Not only that, but the company has been aggressive in placing smaller versions of its outlets inside supermarkets and the like -- exactly the type of place a coffee vending machine is likely to be located. Starbucks is already ubiquitous and convenient, so it's hard to imagine that any automated coffee-making will bring in substantially more custom.
A little pop
Coinstar shares understandably rose a bit (by around 7%) when the sell-off rumors found their way online and in print. What investor doesn't like the prospect of a buyout, after all? The increase wasn't that substantial, though, and shares have traded at a fairly steady level since then. There don't seem to be many out there who feel that Coinstar will cash out at much of a premium.
Believers in its ability to deliver results from video on demand or from machine-delivered Starbucks might beg to differ. For these optimists, the stock could be an opportunistic buy at current levels. But that perceived value is only likely to happen at least several years in the future, when the company's more thoroughly weaned itself off those shiny silver discs. If that happens at all.
Like Coinstar, many believe Netflix is an also-ran given its relatively depressed share price. It's still a fascinating company, though, which is why we've produced a premium report on its prospects. Not only is this in-depth analysis a huge bargain at only $9.99, it includes a full year of free updates. As such, it's essential for any current or potential investor in the company. Download your copy right here.