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Investor Ups Stake in Redbox Parent, Seeks Possible Breakup of Company

7 Oct, 2013 By: Erik Gruenwedel, Chris Tribbey

Jana Partners could force changes at Outerwall that include selling streaming service Redbox Instant by Verizon

The largest investor of Outerwall — parent to Redbox — Oct. 4 disclosed in a regulatory filing that it had upped its stake to 13.5% and would seek a meeting with management to discuss selling off some of the company’s assets — including possibly subscription video-on-demand service Redbox Instant by Verizon.

Outerwall, with more than $1.6 billion in market valuation, has sought to diversify its portfolio as investors increasingly frown upon a company whose two core assets — Redbox and Coinstar — are considered to be in mature (non-growth) markets.

Redbox didn’t help its cause when Outerwall in September said margins at the kiosk vendor would fall below expectations in the second half of the year as consumers rent movies for fewer days, among other issues.

Bloomberg — citing a source familiar with the situation — reported that Jana will push Outerwall to sell the Coinstar coin trading business and Redbox Instant, the nascent SVOD service (with a disc-rental component) that thus far has gained little traction among consumers or made much of a dent in industry leaders Netflix, Amazon Prime and Hulu Plus.

In addition to Redbox Instant, Outerwall is investing in electronic recycling and coffee vending, among other initiatives.

“We have been skeptical about many of Outerwall's new ventures for some time, and have questioned the length of time it has taken the company to bring even the promising initiatives to market,” Wedbush Securities analyst Michael Pachter wrote in a Oct. 7 note. “While we believe that the company's coffee and ecoATM ventures have some potential, we have been uniformly skeptical about its other initiatives, and many of our clients have shared our skepticism.”

Pachter believes Jana Partners will be joined by several other shareholders, and together they will succeed in convincing management to focus on cash generation.

Eric Wold, analyst with B. Riley & Co. in Los Angeles, said it would be a mistake to spin off (or shutter) Redbox Instant as there remain a number of meaningful synergies between it and the various Outerwall divisions, including strong relationships with various retailer partners (that would be harmed with having separate management teams) and the operating leverage involved with a unified field service organization and back-end software management network.

“While Redbox Instant only just launched publicly in March, it is expected to generate profits in the next year, and I believe it will be a positive contributor to kiosk traffic going forward (helping to leverage a relatively fixed cost structure),” Wold wrote in an email.

Wold, who is bullish on home entertainment, believes Outerwall’s biggest change opportunities revolve around new ventures such as coffee and electronic recycling — a division he said has been a disappointment and drain on management’s attention and company’s cash flow.

“I would not be surprised if that was shut down and the development of new ideas was completely outsourced,” Wold wrote.

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