Class of 2018 | suyh@wharton.upenn.edu
On September 27th, Outerwall declared that the $1.6 billion deal with Apollo Global Management was successful. Apollo first announced its 100% cash tender offer on July 28th, which resulted in an 11% premium from the pre-market trading price.
Outerwall is composed of three core businesses: Redbox, Coinstar, and ecoATM. The main source of revenue for Outerwall, Redbox, is a DVD and video game rental kiosk placed in over 33,060 locations in the U.S and Puerto Rico. Outerwall acquired Redbox in 2008 and based on the 2015 10-K report, Redbox contributed approximately 80% of Outerwall’s gross revenue. Prior to the acquisition of Redbox, Coinstar was Outerwall’s primary business since its inception in 1992. Coinstar and Coinstar Exchange are also self-service kiosks like Redbox that enable customers to exchange coins and unused gift cards into cash respectively. The segment is now the global leader in self-service coin counting kiosks that processes approximately $3 billion in coins annually. Lastly, ecoATM is a self-service kiosk where customers can sell used electronic devices such as phones for cash. This segment primarily generates revenue by selling the used electronic devices to 3rd party resellers. At an ecoATM, a potential customer will place an electronic device on the test station that will gauge the fair market value of the used product in a few minutes and then make an offer. In addition, Outerwall has an online version of ecoATM called Gazelle that allows users to not only sell their used products, but also buy pre-owned devices ranging from smartphones to tablets. Redbox, Coinstar, and ecoATM have 40,480, 20,930, and 2,250 kiosks respectively. The future success of Outerwall’s core businesses depends on their ability to forecast costumer demand and maintain relationships with retail partners such as Walgreens, Walmart, Kroger and CVS Pharmacy.
The board of Outerwall has been under tremendous pressure from Engaged Capital, an activist hedge fund, to explore the possibility of taking the company private. Public companies such as Outerwall usually become targets for activist hedge funds when there is potential to turnaround a poorly managed company that has a weak bottom line or could be more profitable as a privately run company. As of June 2nd, Engaged Capital had a 14.1% stake in Outerwall, making it the company’s second largest shareholder. Prior to the Apollo deal, Engaged Capital has urged Outerwall to sell or discontinue its ecoATM segment. Outerwall acquired ecoATM in July of 2013, and the segment has been operating at a loss ever since. During the second quarter of 2015, Outerwall even had to recognize a goodwill impairment charge of $85.9 million as a result of ecoATM’s poor turnout. During an acquisition, the assets of the target company are consolidated into the acquirer’s balance sheet and the premium paid for the company during the transaction is recorded as an intangible asset called goodwill. Accounting standards require companies to reduce or impair the value of assets, including goodwill, on their balance sheets if the market value is less than the book value. In addition to ecoATM, the Redbox segment is also performing poorly. Such a trend could be the result of more competitive alternatives for customers such as Netflix. In addition, the main reason Outerwall places Redbox kiosks near convenient stores in the first place is due to the high volume of foot traffic such stores generate; however, the growing popularity of e-commerce platforms such as Amazon are not only stealing customers away from brick and mortar retailers but also affecting Redbox sales. In addition to the decline in revenue, Outerwall decided to discontinue the operations of Redbox’s Canada segment in the first quarter of 2015 since it was not profitable. The losses incurred from the Canada segment were $5.1 million, $18 million, and $47 million net of tax for 2015, 2014, and 2013 respectively.
On July 28th, Apollo Global Management acquired Outerwall for $52 per share, representing a 51% premium since the board announced it was seeking strategic alternatives on March 14th. In terms of the actual transaction, Morgan Stanley advised Outerwall on the sale of the company. On the other side of the table, Liontree Advisors, Bank of America, Barclays, Credit Suisse and Jefferies advised Apollo Global Management. Outerwall and Apollo have announced that the 3 core segments of Outerwall will be operated as three separated businesses moving forward. Apollo has appointed Galen C. Smith, James H. Gaherity and David D. Maquera were named CEOs of Redbox, Coinstar, and ecoATM respectively.