The announcement of Apollo’s purchase of Shutterfly and photographer Lifetouch has attracted attention to the consumer digital print business and the volume photography market.
This is part one of a series of articles in which I’ll share my perspective concerning the events those of us in the photography and imaging industry have been watching closely and wondering about – the Shutterfly acquisition of Lifetouch; what happened and why.
Here’s a quick reminder of the announcements that captured our attention.
• On January 30, 2018 Shutterfly Inc. announced its intent to acquire school photography company Lifetouch.
• On April 2, 2018 Shutterfly closed the $825 million acquisition of Lifetouch.
• On February 5, 2019 Shutterfly effectively hung out the “for sale sign” when it announced that they had retained Morgan Stanley as a financial advisor to the board and that they had formed a committee to conduct an ongoing review of strategic alternatives.
• On June 10, 2019 Apollo Global Management LLC, a leading global alternative investment manager, agrees to acquire Shutterfly Inc.
• On September 25, 2019 Shutterfly Inc. is acquired for $2.7 billion by affiliates of the Apollo Funds.
It took less than 20 months for Lifetouch to change hands from a privately held company to a publicly traded company back to a privately held company again.
What happened? Two words come to mind: expectations and execution.
Expectations and Execution
In the October 2018 Hanging Pixels podcast with TW Woodward I was asked if Shutterfly would resume the acquisition strategy that both Shutterfly and Lifetouch used to grow their businesses. I said not yet, in fact, I mentioned the possibility of Shutterfly being the next acquisition target.
The reasoning behind my statement was simple. If Shutterfly couldn’t quickly monetize the Lifetouch acquisition or if the performance assumptions Shutterfly’s leadership had about their core business didn’t materialize then it would appear to the Shutterfly board of directors and to the investment community as though there was a swing and a miss by the Shutterfly leadership team. Expectations were high.
It’s kind of like Babe Ruth pointing his bat at the center field bleachers indicating a home run and then hitting a double instead. Hitting a double isn’t bad, but it’s not what was expected. Babe lived up to the gesture…Shutterfly didn’t. Babe also didn’t need to garner financing for his time at the plate.
A lot of things needed to go right in a fairly short period of time in order for Shutterfly to meet expectations. They didn’t. Flawless execution was required.
One of the most important things that did go right for Shutterfly was Lifetouch’s account growth. Lifetouch signed more new schools and retained existing ones at a higher rate than they had in recent history. So in one key area, account growth the Lifetouch division lived up to expectations and in so doing delivered on EBITDA. The Shutterfly Consumer division however, did not. While it wasn’t a strike out…it certainly fell short of a homerun. It fell short of expectations.
The Share Price Roller Coaster
Those of us following the industry watched an amazing share price roller coaster ride for Shutterfly investors and management.
Shutterfly’s stock price rose to an all-time high shortly after the acquisition of Lifetouch soaring to over $96 per share, more than doubling the pre-Lifetouch share value. Less than a year later the stock hit a five year low of $35.60, approximately $10 per share less than before the news of the acquisition.
After Shutterfly hit its stock price high I was quoted in a Quant Media article saying that a $65 share price better recognized the reality of the mature school picture market and the level of effort ahead for the combined companies. As it turns out I missed with that number. Apollo did the deal at $51 per share.
The share price roller coaster is a difficult place to live. I have two observations to make concerning the Shutterfly share price roller coaster ride.
First: It’s never as good as it looks and it’s never as bad as it seems
The stock price rose too high with investors “giddy” about something they really did not understand. Once the investment community realized that emotion rather than results was driving value they punished Shutterfly and drove the share price down (probably lower than it should have been) once again not really understanding and studying the business. In other words, the acquisition news wasn’t as good as it first appeared but it also wasn’t as bad as it later seemed.
Second: These are mature companies in mature industries
Lifetouch is a mature company in a mature industry. The market has become increasingly commoditized and competitive with declining sales and participation rates.
If you recall, the underlying premise for Shutterfly buying the nation’s largest school picture company began with the fact that Shutterfly and Lifetouch share a complementary customer base, and that Lifetouch’s customers were precisely the customers Shutterfly most wanted to acquire.
Shutterfly believed they could convert the Lifetouch customer to the Shutterfly consumer business and shore up a weakness in that business by finding a new channel of customers.
But all of this presupposes the ongoing health of the school picture business, Lifetouch’s ability to execute under new ownership, Lifetouch and Shutterfly’s capability in transitioning or integrating systems, and Shutterfly’s ability to drive Lifetouch consumers to Shutterfly’s mobile photo storage, printing and product platform…quickly.
The school picture industry is experiencing a steady decline as mobile photography and mobile image management solutions grow. Lifetouch, lacking organic growth for several years, grew the business through acquisitions.
In February 2018 I wrote an article with a warning in it for Shutterfly. In it I said, “…participation rates and the consumers shift to mobile and away from prints continues to plague school photography… and if evidence of a change in the school picture model by Shutterfly and Lifetouch is not on the horizon the combining of these two powerhouses may do little to change the trend line. In other words, a solid strategic move that enables the maximizing of today’s model for the near term but not the creation of a new model that will drive the future of the industry.”
There’s nothing wrong with the tradition of school pictures, as we know it today. It’s just not a long-term growth vehicle for tomorrow.
Shutterfly is a mature company in a mature market. The business has become increasingly commoditized and competitive with declining sales of photo prints industry wide.
Shutterfly had been facing increasing competition from other online digital photography services companies such as Snapfish and Vistaprint, as well as brick-and-mortar retailers such as Costco, Wal-Mart and Target. All of which offer low-cost and convenient digital photography products and services.
The barrier to entry for a determined player like Google or Amazon is relatively low and arguably they are better connected to and in deeper relationship with their consumers.
What’s different – what’s better about Shutterfly from those already in the business or those with the potential to get into the business?
Does the acquisition of Lifetouch change any of that?
That Pesky Thing and Those Pesky People
Did investors just stop believing? Some did. Publicly traded companies must deal with that pesky thing called share value and those pesky people called shareholders.
Interestingly enough the financial benefits of the acquisition had started. Lifetouch delivered $85 million of adjusted EBITDA in the second quarter of 2018 making it a significant contributor to Shutterfly’s profits and for fiscal year 2018 Lifetouch generated net revenue of $759 million (a 9 month year given the timing of the acquisition).
In fact Lifetouch showed year-over-year growth in 2018 and met expectations. It appeared that some momentum had been built up.
But then there was the underperformance in the Shutterfly consumer division, with lower than expected growth, which really seemed to drag down results and dampen investor enthusiasm.
Had Shutterfly achieved its gross margins and the planned revenue and cost synergies this might have been a different story. Did everyone want too much from Shutterfly and Lifetouch too quickly? Were expectations too high?
Perhaps, but it’s not as simple as that. The investment community and the Board of Directors had to be asking, “How do you add a billion dollar business to your portfolio, one nearly equivalent to the acquirer and lose share value in that same year?”
And the answer is – not without consequences. One of which was putting the company up for sale. Shutterfly had danced with the private equity community before. Cerberus Capital Management and others had shown interest in them. As a result seeking an answer there wasn’t difficult or unfamiliar to them. And it was something that could be completed fairly quickly. Publicly traded companies must deal with that pesky thing called share value and those pesky people called shareholders and Shutterfly was no different.
While the acquisition of Lifetouch likely fueled the share price roller coaster it also likely enhanced Shutterfly’s attractiveness to buyers. Lifetouch represented adding 10 million perspective households of image active customers and approximately one million new kindergarten households annually to the buyer.
In part two I’ll continue the discussion and take a deeper look at how the combination of expectations and execution played out for these leaders in the consumer digital printing business and the volume photography market.
Mark Schoenrock, President PSPConsulting