Shutterfly to acquire privately-held Lifetouch for $825 million

Shutterfly (NASDAQ: SFLY), the leading online retailer and manufacturer of high-quality personalized products and services, and Lifetouch, the national leader in school photography, today announced a definitive agreement for Shutterfly to acquire privately-held Lifetouch for $825 million in cash.

“Shutterfly and Lifetouch, two undisputed leaders in their respective industries, are both built around the mission of helping customers share life’s joy through photos,” said Christopher North, President & Chief Executive Officer of Shutterfly. “The two companies are uniquely well suited for one another, with similar target customers as well as complementary manufacturing capabilities. Most exciting of all is the potential to bring together Lifetouch’s unique access to millions of families who value high-quality photographic portraits with Shutterfly’s cloud photo management, product breadth, and product creation capabilities. Together, the two companies will accelerate each other’s respective strategies, driving shareholder value through consumer growth and significant incremental profits and cash flow. We’re excited to welcome the Lifetouch team to the Shutterfly family.”

Lifetouch is the clear leader in school photography. The company photographs more than 25 million children annually during the cherished fall picture day tradition, serving more than 10 million households, including more than one million new kindergarten households annually, across more than 50,000 schools. In Lifetouch’s fiscal year ended June 30, 2017, Lifetouch revenue was $963.9 million, and EBITDA was $111.3 million (audited).

Lifetouch provides Shutterfly with a highly complementary business. Shutterfly expects to gain access to many Lifetouch customers as Shutterfly customers, where they will benefit from Shutterfly’s leading cloud-photo management service, product creation capabilities, mobile app, and broad product range. Lifetouch will be able to offer Shutterfly’s broader product range to the Lifetouch customer, as well as to accelerate the development of Lifetouch’s online platform. The companies also expect to realize significant supply chain, manufacturing, and fulfillment synergies over time.

“I’m excited to join the Shutterfly team,” said Michael Meek, CEO of Lifetouch. “Shutterfly and Lifetouch have a common mission and a common culture. Similar to Shutterfly, Lifetouch has a large and loyal customer base, and a talented and dedicated team that are excited about the opportunities at the combined company. As Lifetouchcontinues to leverage technology to better serve our customers, Shutterfly’s capabilities across photo management, product creation, and ecommerce will accelerate this transformation.”

The Board of Directors of Shutterfly and the trustee of the Lifetouch ESOP both approved the acquisition, which remains subject to customary closing conditions, including regulatory approval. The companies expect the acquisition to close in the second quarter of 2018. Shutterfly will finance the acquisition with an incremental $825 million Term Loan B issuance. In connection with the acquisition, for the time being, Shutterfly will suspend its share repurchase program in favor of near-term de-levering.
Shutterfly expects the acquisition to result in approximately $935.0 million of additional Net revenues, and approximately $100.0 million of additional Adjusted EBITDA, in the twelve-month period following closing of the acquisition.

With this acquisition, the combined Company targets a minimum of $450 million of Adjusted EBITDA by 2020. For additional information on the components of this Adjusted EBITDA target, please see the presentation accompanying the Company’s conference call.

Morgan Stanley & Co. LLC is serving as financial advisor to Shutterfly for the acquisition, and BMO Capital Markets is serving as financial advisor to Lifetouch Board Special Committee.

About Non-GAAP Financial Measure
This press release contains a non-GAAP financial measure (adjusted EBITDA). We have not reconciled our combined company non-GAAP Adjusted EBITDA target of $450 million for 2020 and Lifetouch non-GAAP Adjusted EBITDA of $100 million for the twelve-month period following closing of the acquisition to comparable GAAP operating income at this stage of the process because it is unreasonably difficult to provide guidance for stock-based compensation expense, capitalization and amortization of internal-use software and charges related to the proposed acquisition, which are reconciling items between GAAP operating loss and non-GAAP Adjusted EBITDA. The factors that may impact our future stock-based compensation expense and capitalization and amortization of internal-use software are out of our control and/or cannot be reasonably predicted, and therefore we are unable to provide such guidance without unreasonable effort. Factors include our market capitalization and related volatility of our stock price and our inability to project the cost or scope of internally-produced software and charges related to the proposed acquisition during this time period.

To supplement the Company's consolidated financial statements presented on a GAAP basis, we believe that this non-GAAP measure provides useful information about the Company's core operating results. We believe this measure provides both management and investors a more complete understanding of the Company's underlying operational results and trends and performance. The method we use to produce this measure may differ from the methods used by other companies. The presentation of additional information is not meant to be considered in isolation or as a substitute for measures in accordance with GAAP. For more information, please see Shutterfly's SEC Filings, including the most recent Form 10-K and Form 10-Q, which are available on the Securities and Exchange Commission's Web site at www.sec.gov.
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