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Should shareholders vote for Shutterfly sale? Analyst says yes, with reservations

While most industry watchers have acquiesced that the acquisition of Shutterfly by Apollo Global Management, with the corresponding merger with Snapfish, is a done deal, there are still some steps to be completed by the expected close by the end of the year. First, the merger is subject to government scrutiny under the Hart-Scott-Rodino Act, designed to maintain competition. As we wrote previously: “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.”

On the other hand, the recent $1.4 billion merger agreement of Quad/Graphics and LSC Communications was called off. The U.S. Department of Justice (DOJ) sued to block the acquisition in June, and this month the U.S. District Court for the Northern District of Illinois set a litigation schedule that includes a trial that would start in mid-November at the earliest and that would not result in a decision on the merits until 2020. The added delay, uncertainty and cost of legal challenges caused the parties to scuttle the deal.

Could the DOJ do the same here? It’s hard to believe the government would see the highly diversified photo personalization and printing market in the same light but, then, this is the government we are talking about here.

What’s the best move for shareholders?

At the Dead Pixels Society, we don’t pretend to be stock analysts; in fact, there’s usually not a lot of correlation between the stock market and the realities of the photo business. Many successful photo companies are not publicly traded and – as the Shutterfly plan to go private shows – it may be best for them not to be.

Shutterfly shareholders, however, still must vote on the merger agreement. At an offer of $51 per share, the question remains is this enough for Shutterfly’s investors who are primarily large institutions and funds.

Kurt Pollet, writing at SeekingAlpha, had an interesting perspective from a stockholder’s position. His contention is, based on Shutterfly’s historically slow growth and bleak prospects for becoming a growth stock, the merger is a good deal for shareholders. He writes:

While the $51 takeover offer is more than Shutterfly’s low stock price seen this year, I suspect that there’ll be unhappy investors who had hoped for a higher offer. Management made the following statement in their press release.

‘We ran a broad and comprehensive process, engaging with a significant number of potential buyers, and are pleased that the process culminated in a transaction that maximizes value for Shutterfly stockholders.’

I think management’s response here is to soothe investors’ reactions, especially considering that Shutterfly’s stock price reached almost $100 during 2018. Management pointed out that they engaged with a significant number of potential buyers, and they are pleased with the outcome. To me, this says that the best offer they received was $51, and they took this as it was the best offer available.

Pollett cites growing “increasing competition” from online foes Snapfish and Vistaprint and from “brick-and-mortar retailers” like Walmart, Costco and Target  “which offer low-cost digital photography products and services.” This shows the writers’ limited knowledge of the market, as no industry watcher would ever put Target in a top-three list and omit Walgreens or CVS. He also fails to mention the industry cancer that is over-capacity, which is driving backchannel consolidation discussions all around the personalization, graphics arts, and printing businesses.

Even with the addition of Lifetouch to boost non-peak production and the plant rationalization that resulted, Shutterfly is still only expecting annual growth of 3% growth for fiscal 2020, he said. Despite Pollet’s lack of photo business knowledge, his conclusion is still valid:

“It appears to me that Shutterfly is no longer a growth stock, and management has realized this. Sure, the company is still profitable, but stock price gains over the long term are tied to a company’s ability to grow. Now, if Shutterfly can no longer grow, then it’s probably best to exit now.”

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