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Spoiler Alert: Nobody's Gonna Buy Outerwall

By Rick Munarriz – Mar 17, 2016 at 10:05AM

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Outerwall stumbles, doubles its dividend, and is exploring strategic alternatives, but this doesn't mean that shareholders will have a happy ending.

Seeking a suitor and finding one aren't the same thing, something that's evident in online dating and Corporate America. Shares of Redbox parent Outerwall (OUTR) have soared 14% over the past two trading days after revealing it is exploring strategic alternatives, paving the way for a potential acquirer to snap up the automated kiosk operator. 

This is often a precursor to a buyout bid, but just because you're selling doesn't mean that somebody's buying. Outerwall's Redbox is in a state of decline, and that's a pretty big deal since it accounts for 77% of its parent company's business.

Redbox used to be a thriving business. Folks would flock to the kiosks by the entrances of high-traffic retail establishments to take advantage of renting movies or video games for as little as a buck a night. It undercut the pricing of traditional video stores. It offered the nearly instant gratification that Netflix (NFLX 3.74%) couldn't deliver with its original mail-based model.

Things got even better once local DVD shops began going out of business. It dried up the alternatives for impulse rentals, but the "Redbox and chill" phase didn't last. Several factors started to undo Redbox's charm. The biggest killjoy, of course, was the arrival of streaming television. Netflix was all over this in 2007, and Outerwall didn't roll out the short-lived Redbox Instant until it was too late. Suddenly both convenience and instant gratification were in Netflix's corner.

It also didn't help when movie studios began to get stingy with their release windows. Redbox and Netflix's DVD business agreed to hold off on stocking some new releases for the first four weeks of market availability, nixing access to titles when demand was the strongest. Outerwall was able to initially acquire rival kiosk operators as they were bowing out of the disintegrating market, and when that wasn't enough it began hiking its prices. The value proposition was no longer there at $1.50 a night for a DVD (or $2 for Blu-ray discs and $3 for video games). The market appetite was no longer there. 

Outerwall's business is in a funk. It's coming off of yet another disappointing quarter. Redbox scored just 135.8 million rentals during the fourth quarter, 24% fewer that it rang up during the prior year's holiday quarter. The DVD is fading, something that's also evident at Netflix's original DVD business. That will make the potential sale of Outerwall tricky. Its other kiosks that swap coins or consumer electronics for gift cards are holding up better than Redbox's business, but as rentals fade it will eat into Outerwall's healthy cash flows. 

Outerwall is also moving to double its dividend, but that's an illusion. It won't be able to sustain the cash flow to keep that going as its business disintegrates as its model continues to come undone. Outerwall may want a way out, but that exit all but sealed up a couple of years ago.

Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Netflix Stock Quote
$316.95 (3.74%) $11.42
Outerwall Inc. Stock Quote
Outerwall Inc.

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