Hulu Stops the Bidding, Who Wins?

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Hulu's media industry owners were looking to get out from under the business by putting the online video site on the auction block. That didn't work out, so now they are rumored to be talking to Time Warner Cable (NYSE: TWC) on an investment deal. That's a win for Yahoo! (NASDAQ: YHOO) and AT&T (NYSE: T), but Hulu might be a better fit with DirecTV (NASDAQ: DTV).

Hulu was intended to compete with Netflix. However, from the start Hulu had to serve two masters, its customers and its owners. Since the service's owners also owned television and cable stations, Hulu focused on getting new content online without interfering with the television distribution model. That's not nearly as appealing to customers as Netflix's anytime, anywhere, anyway model.

Complications

This is actually why Yahoo! investors should be happy that a Hulu bid is off the table. Yahoo! is steeped in the Internet's open access approach, while Hulu is trying to keep a closed loop intact. It's highly unlikely that the company's media owners and content providers would have been willing to let Yahoo! make the changes that Yahoo! CEO Marissa Mayer would need to turn Hulu into a competitive threat.

Under Mayer, Yahoo! has started to stabilize its business and change gradually toward a more entrepreneurial model. That's been good to see and has involved multiple small acquisitions. Adding Hulu would be a huge distraction. With a price to earnings ratio of around 8 and revenues stuck in the $4.9 billion area, this is a solid turnaround play for more aggressive investors.

The Telecom Giant

AT&T was another rumored bidder that's better off without Hulu. The company has been facing increasingly stiff competition in the cellular service arena. Although the telecom giant provides the pipes over which content is delivered, it really isn't a media distributor. The bid suggests a grab for acquisition-driven growth, not the addition of a truly complementary asset. The $1.2 billion Leap Wireless purchase, on the other hand, is a better fit.

That said, AT&T's top-line has grown only modestly over the last four years, moving from $123 billion to $127 billion. Earnings have fallen over the span. And, more recently, sales have stagnated as smaller players pair up to compete more aggressively.

Rumors over foreign telecom purchases have frequently included AT&T's name. A big telecom deal or more small acquisitions like Leap have a better chance of jump-starting the top and bottom lines again than adding Hulu would have. AT&T, yielding around 5%, is a decent option without Hulu for income-oriented investors.

Where Hulu Complements

Time Warner Cable and DirecTV are better fits for Hulu. Both live within the same media world as Hulu and have notable relationships with the service's current owners. So there wouldn't be any need to change how Hulu is run. And a deal would give both companies a branded Internet distribution platform.

Of the two, however, DirecTV would likely benefit more. The company is a satellite television provider in the United States and in Latin America. Buying Hulu would allow it to grow its customer base among those that would never even consider a satellite deal, opening a new avenue for growth.

DirecTV's earnings have risen from just under a dollar a share in 2009 to over $4.50 last year. The top-line has been growing solidly for a decade. It has a notable debt load, but could handle a Hulu purchase. With a PE of around 14, DirecTV is reasonably priced and still has plenty of growth potential ahead. Adding Hulu would make the future even brighter.

Time Warner Cable, however, is the one rumored to be working on an investment in Hulu. That will let Time Warner Cable attract customers from competitors in markets it doesn't serve. Still a good business call, but not quite as compelling a growth story as DirecTV.

Although the company's top and bottom lines have been growing steadily since its separation from Time Warner, the shares have also been on a steady ascent lately. It's made a particularly swift advance in the last few weeks. The PE ratio of around 16 is about five percentage points above its five-year average, so now probably isn't the time to jump aboard. Buying into Hulu won't change that.

Winning by Losing

AT&T and Yahoo! are probably the big winners right now in the Hulu grab. Both are still solid opportunities for income and turnaround investors, respectively. Time Warner Cable should do well with an investment in Hulu, but that doesn't make its relatively pricey shares any more compelling. DirecTV would probably have benefited more.

The television landscape is changing quickly, with new entrants like Netflix and Amazon.com disrupting traditional networks. The Motley Fool's new free report "Who Will Own the Future of Television?" details the risks and opportunities in TV. Click here to read the full report!


Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends DirecTV. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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