M&A Alert - June 4, 2010
Sonic Solutions Acquires DivX
Transaction Overview
On June 2 2010, Sonic Solutions (NASDAQ:SNIC) announced it was acquiring DivX (NASDAQ:DIVX) in a cash and stock agreement worth $323 million.
Target Description
DivX (NASDAQ:DIVX) has video compression/decompression (codec) technology suitable for premium content and DRM technology that is widely accepted in the film industry by studios such as Paramount, Warner Bros., Sony, LionsGate and Starz Media. Their software is built into more than 300 million devices ranging from televisions to PCs to mobile devices. The Company went through an IPO in May 2006 and was trading in the range of $6 to $8 before the acquisition. The Company received four rounds of funding totaling $35 million with the major players being Timothy Draper, Zone Ventures, New Atlantic Ventures, Epic Ventures and Insight Venture Partners. The Company acquired MainConcept AG in 2007 for $28 million, which also developed high-quality video codecs, as well as AnySource Media in 2009 for $15 million, an internet TV company. Direct codec competitors include industry giants such as Apple Quicktime, Microsoft Windows Media, Google, Real Networks and Rovi Corporation (previously known as Macrovision) as well as open source codec developers such as Xvid and VideoLAN (VLC).
Buyer Description
Sonic Solutions is a video management software company focused on “enabling digital media from Hollywood to Home.” Their software and services range from producing Hollywood Blu-ray and DVD titles to consumer-oriented Roxio digital media management software. They currently specialize in CD, DVD and Blu-ray Disk encoding and production; however, their focus has recently shifted toward developing digital content delivery solutions over the Internet. The Company’s CinemaNow service sells or rents movies and TV shows over the Internet, a business which is widely cited as the company’s next focus. The Company is headquartered in Marin County, California. The key executive sponsor was Sonic Solutions CEO Dave Habiger.
Transaction Parameters
The deal was valued at $323 million in a combination of cash and stock. Shareholders of DivX are to receive $3.75 in cash and .514 shares of Sonic Solutions stock for every share of DivX stock. This would price the stock of DivX at about $9.83 per share.
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| Enterprise Value1 | $187.4m |
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| Purchase Price Multiples2: | |
| LTM Revenue | 2.5x |
| LTM Net Income | 114.5x |
| Est. 2010 Revenue3 | 2.3x |
| Est. 2010 Net Income3 | 65.5x |
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| Premium Paid: | |
| 1 day prior to announcement | 41% |
| 30 day average prior to announcement | 38% |
| 90 day average prior to announcement | 34% |
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1. Transaction Value + Total Debt – Total Cash
2. Sonic Press Release June 2 2010
3. Yahoo! Finance June 2 2010
Strategic Rationale
As video content delivery begins to move to cloud-based solutions, Sonic Solutions has shifted focus toward an Internet-delivery business model. Sonic Solutions’s acquisition of DivX will allow them push cloud-based premium video delivery by utilizing DivX’s approved DRM and codec solutions. DivX is already widely installed on millions of hardware devices, which will give Sonic an advantage in disseminating video players on PCs, TVs , personal media players and DVD players.
Architect Partners’ Observations
This acquisition is another part of the race to bring content to Internet-enabled televisions. Google, for example, recently released its VP8 video codec as open source , announced Google TV and is introducing an online video project called WebM. This move is putting pressure on competitors in the Internet television business. With the acquisition of DivX, Sonic Solutions is buying a consumer-branded video store, an existing content distribution platform and access to a large installed base of DivX players.
DivX entered their 2006 IPO with significant momentum, priced at $16 per share (above their $12-$14 target), and proceeded to double share price to a peak of $32 in the two months post-IPO. Their momentum faded from this point with the stock steadily dropping to a trading range of $6-$10 where they have stagnated since July 2008.