Analysis: Gauging the impact of the new Shutterfly-Snapfish merger deal

The breaking news this week wasn’t that Apollo Global Management announced $2.7 billion all-cash deal to acquire Shutterfly Inc.; that had been telegraphed for some time. Shutterfly’s board had set up an exploratory committee to make this happen (although it wasn’t the first time). Nor was it the announcement the company found a new president and CEO in Ryan O’Hara, an experienced executive. Again, current president Christopher North had already announced his plans to relocate back to England. No surprise there.

The announcement sending shockwaves through the industry was the addition of Snapfish as part of the deal. In a separate but related transaction, Apollo Funds announced into a definitive agreement to combine Snapfish with Shutterfly. Upon the closing of the Snapfish transaction, Snapfish’s owner, District Photo Inc., “will become significant minority owners in the combined Shutterfly and Snapfish business.”

“The Apollo Funds bring substantial financial resources as we continue to invest in innovation, as well as valuable strategic perspectives to drive growth over the coming years,” says Neil Cohen, chairman of Snapfish and CEO of District Photo, in a press release. “We are committed to supporting the company and continuing our relationship as a fulfillment partner.”

This is the second time District Photo has sold Snapfish. Launched in 1999 as part of the first wave of online photo-printing companies – along with Ofoto (later Kodak Gallery) and Shutterfly (which later acquired Kodak Gallery) – Snapfish was first acquired by District Photo in 2001, then sold to HP in 2005 for $300 million in cash. In 2015, District then acquired Snapfish back from HP.

The details of this latest Snapfish deal weren’t announced, but some industry estimates put the sale of Snapfish at about $300 million. Of course, given the equity in the new combined Shutterfly/Snapfish entity and the continued fulfillment business, it’s possible this was a stock transaction, not a cash one.

The question going forward, however, is what happens next. There are probably very few Snapfish customers that don’t also have Shutterfly accounts, so the net gain of customers is likely minimal. Given the capacity glut in the graphic-arts industry, it’s possible there could be further rationalization of printing resources – especially in the off-peak school photography and commercial printing segments – but both Snapfish and Shutterfly will need all available cylinders firing in the all-important fourth-quarter gifting season.

Our friends at Keypoint Intelligence-InfoTrends have a similar view:

“Apollo Senior Partner David Sambur commented ‘we believe that both companies will be better positioned to operate in a competitive marketplace through their enhanced ability to invest in product innovation and deliver the best consumer experience.’ This seems to imply that Shutterfly and Snapfish will continue as separate companies for the foreseeable future, while perhaps sharing expertise in product development and back-end operations. From comments made by (Neil) Cohen, we can also infer that District Photo will continue to provide fulfillment for Snapfish and may also take on a bigger role as a fulfillment partner for Shutterfly,’ writes David Haeuter, Associate Director of InfoTrends’ Photo Printing Trends and Photo Merchandise Trends.”

“Snapfish is a surprise,” adds Alan Bullock, associate director at InfoTrends, adding it will be interesting to if this deal affects DPI’s relationships with white-label retail partners. “District does a bang-up job on fulfillment for retailers and partners.”

Shutterfly looks like it will in good hands with Apollo, which has numerous consumer-facing brands in its portfolio, including Harrah’s Entertainment, Norwegian Cruise Line, Chuck E. Cheese and more.

Future marketing

Since coming back under the District Photo umbrella in 2015, Snapfish has had a relatively quiet marketing position, especially compared to Shutterfly’s regular presence on “The Ellen Show” and other media. Snapfish can be perceived as a discount brand, while Shutterfly has been working for months to shake the discount image. The company management has stated several times it wants to rely less on free-print giveaways to attract customers.

One possible approach is to keep “Snapfish” on the roster as a loss-leader, customer-acquisition brand while maintaining “Shutterfly” as a premium brand. Shutterfly recently trimmed its brand roster, however, with the dropping of MyPublisher, Wedding Paper Divas, etc., so management may not see Snapfish as a long-term asset. (Of course, Shutterfly still owns subscription service GrooveBook, which is regarded as a vanity purchase by former CEO Jeff Housenbold, so who really knows?)

Either way, it’s likely there will be a consolidation of resources between the two companies. One thing private equity companies do is trim the fat, and a combined Snapfish/Shutterfly organization likely has duplicate management functions. Since Shutterfly is still digesting Lifetouch, however, so it will be interesting to see how smooth that process could be. Fortunately, if all goes well with shareholders and regulators, both deals will close in December, meaning the real work can begin in 2020 to realize efficiencies.

Mobile remains a question mark, as well. Snapfish and Shutterfly have mobile apps but neither is top-of-mind for photo buffs. They face competition from mobile-first upstarts like Chatbooks, Mixbook, Printastic, Artifact Uprising, Picaboo, Minted, MailPix, as well as creative photo apps like InstaSize and PicsArt more.

Possible hurdles

Both the Snapfish and Shutterfly deals will have to face regulatory approval. Given the pro-business sentiment of the current administration, however, it’s unlikely too much of a fuss will be made. U.S. antitrust law is usually focused on how damaging a possible combination will be to consumers and, unless opponents can show harm to consumers through either higher prices or reduced services, it is unlikely the deal will fall apart.

Also, there is also a possibility shareholders may not approve of the deal if $2.7 billion isn’t sweet enough for them.