Time Warner reportedly looking to buy piece of Hulu, despite swearing off SVOD

Time Warner Inc. is reportedly in talks to buy a stake in Hulu. The news comes a week after Time Warner chief Jeff Bewkes told investors the company would throttle back the sale of its programming to SVOD platforms.

The Wall Street Journal said Time Warner is in preliminary talks to buy a 25 percent piece of Hulu, which is currently co-owned by Comcast's NBCUniversal, the Walt Disney Company and 21st Century Fox. Hulu is currently valued between $5 billion to $6 billion.

"This is ironic because just last week in their earnings conference call, we thought we heard Time Warner say they had concluded that SVOD was harming the value of the pay-TV bundle and therefore they were going to stop or delay licensing new content to that platform," said Bernstein Research analyst Todd Juenger. "It seems hard to reconcile that stance with the duty they would have as JV partners to drive as much value as possible to Hulu."

Then again, Bewkes also said Time Warner was going to make investments in its digital future. And owning a piece of Hulu is something entirely different than licensing programming repeats to Netflix.

J.P. Morgan said in September that Hulu could be valued by as much as $8 billion by the end of 2016, based on a subscriber growth trajectory from 10 million to 16 million customers. 

"Hulu has approximately 12mm subscribers as of November 2015, with net subscriber additions up more than 60% year over year. At $7.99/month, this equates to a run rate of $1.2bn in annual revenues," noted analysts from Barclays in a note to investors after the WSJ article on Time Warner and Hulu. "Based on the growth in subs and the per sub fees, this implies that Hulu's ad revenue accounted for ~62% in 2013. Assuming this ratio hasn't changed, and using the recent subscriber number, we estimate Hulu's 2015 revenues to be ~$2.5bn, or a compounded growth rate of close to 60%."

For their part, Hulu's owners would see their individual stakes shrink from a third to 25 percent if Time Warner does purchase a stake in Hulu. However, an investment from Time Warner could push content into Hulu from Warner Bros. Television studios, which produces some of the highest rated programming on television. Turner Networks could also fall into the fold. 

"The good news would be a transaction would peg a value on Hulu for its other owners (Fox, Disney, Comcast)," Juenger said. "It would most materially impact valuation of Fox. Most investors we have talked to also believe this is good news for Media because it means Time Warner's content will be directed to Hulu rather than, say, Netflix."

Interestingly, the analysts at Barclays believe Hulu's ad-supported revenue model could make it a strong competitor to Netflix. "Hulu's economics are meaningfully better than Netflix because of the amount of advertising, which is evident by the fact that in spite of having less than 17% of Netflix's subscribers, Hulu's revenues are already 37% of Netflix's total revenues," the analysts said. "Also, given broadcast ownership, Hulu's content pipeline is guaranteed for years to come with windows which are materially shorter than Netflix."

Again, however, WSJ describes the talks as being "preliminary." Representatives for Time Warner and Hulu did not comment on the WSJ report.

For more:
- read this Wall Street Journal story

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