Sonic Solutions to acquire DivX

On June 1, Sonic Solutions and DivX jointly announced a definitive merger agreement for Sonic to acquire DivX. Your intrepid bloggers at Hadley Partners wanted to bring you some scoop and prompt commentary on the proposed transaction.

Deal terms / premium / valuation

DivX shareholders are to receive $3.75 in cash and 0.514 shares of Sonic stock per DivX share. Sonic stock closed on June 1 at $11.83, so total per-share consideration at announcement was $9.83. With DivX’s pre-announcement share price at $6.95, the premium was 41%. However, Sonic’s stock price dropped 12% in the two days after the announcement, reducing the deal premium to 31%.

Post-transaction, DivX stockholders will hold approximately 35% of the equity of the combined company.

At announcement, the valuation being paid for DivX’s equity was $326 million. However, as of March 2010, DivX had no debt and over $135 million in cash on its books. In fact, Sonic is paying less in cash to acquire DivX than the cash it will inherit at closing, so in economic terms this is really an all-stock acquisition.

The transaction is expected to close in September, and is subject to a vote of both companies’ stockholders. If DivX terminates the transaction under certain circumstances prior to year-end, they are required to pay a termination fee of $8.35 million.

Sonic Solutions

Sonic supports the creation and management of digital media with products, software and services. It generates the majority of its revenues in its “Roxio Consumer” segment, where its offerings enable consumers to create, manage and share digital media content (data backup, media transfers, burning DVD’s, etc.). Sonic bought the Roxio brand name and some of this consumer business in 2004 from what is now remembered as Napster. The Roxio Consumer segment generated 87% of company revenue and all of its segment operating profit for the nine months ended March 2010. These sales come through both digital storefronts such as Digital River, distributors such as Ingram Micro and Navarre, and the company’s own website.

Sonic’s second business unit is what it calls its “Premium Content” segment. Most prominently, Sonic offers digital media authoring solutions that enable major studios and other content producers to render their media in different digital forms. Historically, this has been primarily DVD authoring tools. However, this business is evolving rapidly, first toward Blu-ray and ultimately toward digital distribution (streaming, downloading, VOD, DVR functionality). The Premium Content business has been shrinking and losing money, but the company is optimistic about its positioning for the digital distribution growth opportunity.


DivX is a leading provider of digital media encoding and decoding formats and solutions, and also supplies digital rights management (DRM) tools. Encoding/decoding tools (“codecs”) are proprietary offerings that make the delivery of media, in particular video, more bandwidth-efficient without sacrificing image quality. The company generates over 90% of its revenue by licensing its technologies to consumer electronics OEMs (70%) or to software vendors that include DivX technologies in their offerings (22%).

The company is also very strong internationally, with less than 20% of its 1999 revenues derived in the U.S.

Business logic / strategic rationale

Both Sonic and DivX operate within a complex value chain where their solutions work best if broadly available. The value chain involves content creators (both professional and personal), content distributors, consumer electronics/hardware companies, PC/software companies and online and offline retailers. Both companies license their technologies to key consumer electronics OEM’s as well as content creators and distributors.

As the industry evolves from one dominated by hardware distribution (DVD and Blu-ray) to one dominated by digital distribution, Sonic is betting that DivX’s technology strengths, licensing relationships and over 300 million consumer electronics devices with its technologies embedded can all accelerate Sonic’s momentum. Direct synergies from a combination are not obvious – the companies have been working together for years, and will continue to work with other partners – but the ability to bring more value to key business partners and licensees should create some benefits.

It is possible that the transaction has an opportunistic element for Sonic as well. The dramatic rebound in its stock in the last year – almost 20x from its low of $0.60 in March 2009 – is arguably ahead of its business, where revenue for fiscal 2010 was down 12% vs. the prior year and the business lost money for the full year (profitable in the March quarter). DivX’s top line has also been down due to lower consumer electronic sales and related licensing revenues, but its absolute profitability currently exceeds Sonic’s.

The acquisition is intended to enhance Sonic’s recently released RoxioNow content platform, the technology behind the virtual video storefront services that Sonic currently runs for Best Buy, Blockbuster and Lionsgate aimed to provide consumer with access to digital media content from virtually anywhere. Sonic also bought CinemaNow last year and is offering studio content via that website.


Equity valuation – $326 million

Enterprise valuation – $190 million

DivX LTM revenue (March 2010) – $75.2 million

DivX – LTM EBITDA – $9.2 million

TEV / LTM DivX revenue – 2.5x

TEV / LTM DivX EBITDA – 20.7x

via hadleypartners

No comments: