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Verizon published this image with the press release announcing its bid for AOL. Credit: Verizon.
Congratulations, Verizon . You're on your way to purchasing a piece of The Huffington Post. And TechCrunch. And a few TV programs that aren't widely watched. Add it up, and you'll soon have a better content bundle to offer those subscribers to whom you've been pitching faster fiber service. If only there were more of them.
Pay television isn't a growing business anymore. The industry is contracting at a 0.5% annual rate and lost roughly 31,000 U.S. subscribers in the first quarter, as cord cutters fled to the Internet and streaming TV alternatives such as Netflix, saysMoffettNathanson analyst Craig Moffett.
Cable and satellite providers have been responding to the shift by adding more content in hopes that a better bundle will keep consumers where they are. From Comcast's acquisition of NBCUniversal to DISH Network's purchase of Sling TV to DirecTV'snear-deal for Hulu, cable and satellite operators have been acting as if content is the king of kings -- a savior for an industry in need of rescuing.
Now we can count Verizon among this same group, and that's worrying if you're a stockholder. Especially when you consider that AOL lacks a content advantage over the available alternatives.
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What AOL has, and what it lacks
In buying AOL, Verizon gets access to a lot more video than you might think -- over 1 million original and partner videos drawing over 1 billion monthly "multi-platform" views, AdWeek reports. AOL also signed a licensing and distribution deal with NBCUniversal at an event in which it touted nine new series and reups of original series starring James Franco and Steve Buscemi. Even skeptics have to admit that AOL has done well building itself up so far.
For its part, Verizon used a press release announcing the deal to praise what AOL has to offer. "Verizon's vision is to provide customers with a premium digital experience based on a global multiscreen network platform. This acquisition supports our strategy to provide a cross-screen connection for consumers, creators and advertisers to deliver that premium customer experience," CEO Lowell McAdam said.
Trouble is, AOL's programming has yet to infiltrate the pop-culture narrative. Paying a premium for content that has yet to distinguish itself is dangerous. And that's exactly what Verizon is paying. At $50 a share, matching Verizon's offer, AOL trades for over 33 times trailing earnings and over 20 times forward estimates -- a big kicker for a business that, according to S&P Capital IQ, is on pace to grow earnings by just 10.79% annually over the next three to five years.
What Verizon has, and what it lacks
But this deal isn't so much about what AOL can do to drive earnings as what its programming can do to keep FiOS subscribers from fleeing if Google Fiber finds its way to key regions where the service exists. Last year's clever unveiling of "symmetric uploading" for FiOS customers was meant to address the threat at the time. Now, Verizon is adding content to the mix in hopes of keeping subscribers on the hook.
And how will the company pay to acquire AOL? With a mix of "cash on hand" ($4.39 billion as of the end of March) and "commercial paper," or bank debt. Existing investors shouldn't see their interests diluted, which is a good thing. Whether the combined entity enjoys outsized earnings growth as a result of the deal is a different question entirely -- one that's not so easy to answer when you consider how little we know about the long-term appeal of AOL's programming.
The article Verizon's Bid for AOL: A Hail-Mary Attempt to Thwart the Future originally appeared on Fool.com.
Tim Beyersdoesn't have the arm to throw a Hail Mary. He's working on it. He's also a member of theMotley Fool Rule Breakersstock-picking team and theMotley Fool SupernovaOdyssey I mission and owned shares of Apple, Google (A and C class), and Netflix at the time of publication. Check out Tim'sweb homeandportfolio holdingsor connect with him onGoogle+,Tumblr, or Twitter, where he goes by@milehighfool.The Motley Fool recommends Apple, Google (A and C shares), Netflix, and Verizon Communications. The Motley Fool owns shares of Apple, Google (A and C class), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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