According to the transaction statement filed by Getty Images with the U.S. Securities and Exchange Commission last Thursday, negotiations are still ongoing with a potential buyer other than Hellman & Friedman. The document also discloses, for the first time, the revenues of Getty-owned microstock business iStockphoto and other business segments.
Mystery player
Materials prepared by Goldman, Sachs & Co. identify Adobe, Google, News Corp., Reuters and Sony among the companies approached by the Getty Images board as potential buyers. All of these expressed initial interest. Though initial buyout stock-price indications were in the range of $37 to $45 per share, the two early-February offers came in substantially lower.
Over the past year, GYI average stock price dropped to $37.89, trading as low as under $22 on some occasions. Hellman & Friedman proposed $32.75 per share, which was raised to $34 in later negotiations. Getty Images and the private equity firm have since executed a merger agreement.
However, the deal is not entirely concluded. Another potential buyer, identified only as "Sponsor C," offered Getty $30 per share. Though this offer is substantially lower and the buyer lacks financing arrangements, negotiations with Sponsor C appear to continue. "To date, this strategic buyer continues to evaluate confidential information and has held meetings with management," states the Goldman Sachs summary.
The existence of another serious contender is further alluded to in Getty's merger agreement with Hellman & Friedman. While the agreement prohibits the stock agency from soliciting proposals or continuing negotiations with other potential buyers, it makes one exception: "These restrictions are not applicable until April 4, 2008, however, with respect to a certain party with whom the Company has previously engaged in discussions with respect to a proposal."
Though it is difficult to ascertain the likelihood of Getty and the mystery buyer coming to terms, it would not be surprising. Much of the information surrounding this transaction has been misleading, speculative or erroneous. When relocating to New York last summer, Getty Images CEO Jonathan Klein said the move should not be read as the beginning of a search for a buyer. A late-January leak to The New York Times forced the company to admit it was seeking "strategic alternatives." Though both Hellman & Friedman and Sponsor C submitted offers on Feb. 4, The New York Times reported on Feb. 8 that no offers were above Getty Images' then-market valuation of $1.6 billion, suggesting there would be no change to the status quo. Getty announced the 2.4 billion merger agreement with Hellman & Friedman on Feb. 25.
This agreement provides Getty Images with an exit option, in case of receiving a superior proposal. Should Getty decide to terminate the agreement by April 4, it would be required to pay Hellman & Friedman $31 million. After April 4, the termination fee would rise to $52 million.
Slumping traditional creative stills, growing microstock
As part of its advisory services, Goldman Sachs provided an analysis of Getty Images' risks and opportunities. These were supported by revenue projections, broken down by business segment.
Cannibalization by microstock and competition from other lower-priced rivals were identified among the chief risks to future performance. In 2008, Getty's creative stills business is forecast to bring in $461 million, or 51% of total revenues; however, the company expects it to drop to $348 million, or 29%, by 2012.
Goldman Sachs research analysts believe that Getty-owned iStockphoto remains undervalued by investors. IStock's projected 2008 revenues are $122 million. This substantially exceeds the $104 million generated in 2007 by Jupiterimages, which is considered the third-largest stock-licensing company in the world. Shedding new light on the current and potential size of the microstock market, its leader currently accounts for 14% of Getty Images' total revenues and is expected to grow to 22% ($262 million) by 2012.
Editorial imagery, which has exhibited year-over-year growth of 50%, is forecast to grow from $180 million (20% of total revenues) in 2008 to $289 million (24%) in 2012. The footage and multimedia business segment was also identified as a significant revenue source, projected to generate $83 million (7% of total) by 2012. Music licensing is expected to more than triple in the next four years, reaching $46 million (4% of total).
According to Goldman Sachs, Getty Images remains the far-and-away leader of the stock-licensing industry. The company's recent investments in diversifying its business lines have led to a stronger market position and the expectation of continued growth, albeit at slower rates that it had experienced in the past.