Kodak Doesn't Profit as Facebook Bets a Billion on Photo Sharing
"For Shutterfly to eliminate of one of the few scale players in the industry for the proposed price of only $24 million appears to underscore the company's dominance within the industry and the financial weakness of its competitors," wrote Mitch Bartlett of Craig Hallum Capital in a March 2 note.
Shutterfly won't take on the Kodak brand or any of its operating assets or liabilities in a deal that analysts expect to be a long-term jolt to the company's earnings that may be the catalyst to push shares in the direction of 2011 highs, after a second half stock swoon.
"We view this as a prudent use of capital to further consolidate share and potentially mitigate industry pricing pressure," wrote Janney Capital Markets analyst Shawn Milne in a March note reacting to Shutterfly's initial bid. Milne estimated that the Kodak Gallery generates roughly $75 million in revenue, which when added to Shutterfly's earnings, will boost earnings per share by up to 15 cents in 2012.
While the deal may help on pricing and show that other players are struggling to grow, it may also remove the threat of a new entrant like Amazon or Apple that could add an even greater hit to Shutterfly's future profits.
By making the move, Shutterfly removes "the threat of a new or larger competitior (e.g. AMZN, AAPL) entering the space through the Kodak Gallery assets," added Bartlett.
An earnings drain that Shutterfly saw from daily deals sites like Groupon(GRPN) and Amazon's Livingsocial has also moderated. CEO Housenbold said in a recent Morgan Stanley conference that he has identified a new daily deals strategy, as seen in Shutterfly's fourth quarter earnings.
Shutterfly was able to turn a fourth quarter profit after a string of 2011 quarterly losses, bolstered by a more targeted and analytics-based use of deals sites like Groupon and Livingsocial. "