Shutterfly Inc. (SFLY) recently inked an agreement with Eastman Kodak Company to purchase certain assets of its Kodak Gallery online photo services business for $23.8 million. The agreement comprises the initial, stalking horse bid to maximize the value of assets as part of a bankruptcy court-approved auction process.
The Kodak Gallery allows users to store and share their photos online and create custom printed photo books, cards and albums. The service, originally called Ofoto, was acquired by Kodak in 2001 and renamed Kodak EasyShare Gallery in 2005. Given its popularity, the property currently boasts of more than 75 million users and many more interested to join.
Per the agreement, Kodak will transfer Kodak Gallery customer accounts and images in the U.S. and Canada to Shutterfly, and will allow customers to opt out of the transition if they do not want their photos to be transferred.
We view the deal as strategically positive for both parties. Eastman Kodak Co, which filed for bankruptcy protection in January, will be able to streamline its model and concentrate on its core business to reap profits. On the contrary, Shutterfly, which offers photo-related services, will be able to leverage its online photo sharing as well as photo book business through this acquisition.
Shutterfly is focused on growing its business through strategic partnerships with retailers and acquisitions. A year ago, this leading Internet-based social expression and personal publishing services company took over a privately held card design company Tiny Prints. In the second quarter of 2010, the company entered into an agreement with Sony to give customers instant access to Shutterfly’s Simple Path Photo Books on new Sony Vaio computers. The company is also in a tie-up with Target Corporation, a leading discount retailer in the United States. Additionally, the company acquired Nexo in 2008 and TinyPictures in September 2009.
We believe such strategic acquisitions augur well for Shutterfly. Following the Kodak news, there was strong positive impact on Shutterfly shares. The company’s competitors include LookSmart Ltd. (LOOK) as well as the Photoworks and Webshots brands of American Greetings Corp. (AM). These companies offer certain services similar to those of Shutterfly and in some cases at lower price points.
Shutterfly currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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