Silicon Valley Daily reported on April 2 that Shutterfly closed the $825.0 million acquisition of school photography company Lifetouch. The acquisition was announced on January 30, 2018, after having been approved by the Shutterfly Board of Directors and the trustee of Lifetouch’s Employee Stock Ownership Plan.
Why the Rush?
Both companies were anxious to close the deal as evidenced by the short time frame between the date of announcement and date of closing.
The underlying premise of Shutterfly’s purchase of Lifetouch is Shutterfly’s ability to open a new customer acquisition channel and to leverage the content provided by the nation’s largest school picture company.
Over time, they envision a seamless process by which Lifetouch customers will have access to their portrait in Shutterfly’s photo management service, be presented with Shutterfly’s products and receive compelling Shutterfly offers.
Lifetouch has need of Shutterfly’s commitment to invest in the business and a desire to exit the obligation of its Employee Stock Ownership Plan.
Shutterfly’s stock soared on the news of the acquisition to a high of $86.41. The stock remains high having opened at $78.39 on April 3 after the closing of the deal was announced. Shutterfly, Inc. trades on the NASDAQ stock exchange under the symbol SFLY. Shutterfly’s 52-week low was $39.76.
Chris Merwin of Goldman Sachs had downgraded Shutterfly’s stock from neutral to sell on January 17, prior to the announcement. After the announcement he returned his rating to neutral. Even so, the market has rewarded Shutterfly for what is considered a bold strategic move.
Interestingly the closing coincides with Lifetouch’s historical ESOP distribution schedule. The sales proceeds will be paid to the trustee of the ESOP who will then distribute the proceeds in two installments to plan participants.
Once the distributions are made Lifetouch will no longer be required to fund the ESOP (a financial obligation that likely limited investment in the company) and will terminate the retirement plan after the approval of the IRS. Shutterfly has indicated it will introduce a 401k in its place.
Chris North’s Statement
“We are thrilled to welcome Lifetouch to the Shutterfly family, and are excited to bring together two undisputed leaders in adjacent verticals, both of which have the common mission of helping customers share life’s joy through photos,” said Christopher North, President & Chief Executive Officer of Shutterfly. “We are focused on realizing the three value creation opportunities that we previously articulated: gaining access to many Lifetouch customers as Shutterfly customers, offering Shutterfly’s broader product range to Lifetouch customers and accelerating the development of Lifetouch’s online platform, and realizing significant supply chain, manufacturing, and fulfillment synergies over time.”
There has been speculation about whether Lifetouch will be assimilated into Shutterfly or remain a separate business. The indications are that Lifetouch will remain a separate business unit in the Shutterfly organization structure allowing Lifetouch management of their business. Michael Meek will remain as President and Chief Executive Officer of Lifetouch and will report to Christopher North.
Financing and Financial Expectations
The acquisition was financed with an $825 million incremental term loan and Shutterfly has been able to maintain its rating profile through the process.
According to Shutterfly’s January 30, 2018 investor conference call Shutterfly expects the acquisition to result in approximately $935.0 million of additional Net Revenues and approximately $100.0 million of additional Adjusted EBITDA in the twelve-month period following the closing of the acquisition.
If Shutterfly successfully achieves its goals associated with this acquisition Lifetouch should return to industry dominance in more than size alone and Shutterfly will cement its lock on future revenue, EBITDA growth, and category dominance.
Mark Schoenrock, President PSPConsulting