Apple: Color on Beats acquisition
- RBC ntoes Apple announced that it will acquire Beats, Inc for $3 billion ($2.6B immediate and $400M vesting over time). While this is the largest deal completed by Apple, they think the acquisition is a positive as Apple attempts to build larger recurring revenue streams. Highlights from the deal are: i) Talent -- Mr. Iovine and Dr. Dre become full-time AAPL employees; ii) Beats Music -- AAPL gets access to what it believes is a leading subscription music service; iii) High-margin hardware -- AAPL acquires headphones and speaker assets of Beats, which they estimate are sustaining >70% gross margins.
- FBR Capital notes that in a highly anticipated move, Apple announced the acquisition of Beats Electronics for $3B. The deal will be financed with $2.6B in cash, while the $400M balance will be in AAPL shares. This is Apple's largest acquisition on record - one that is likely to bring the co closer to the attractive yet competitive music streaming business. They would not be surprised to see Apple also get more involved in music and other forms of content publishing as a way to further diversify its revenue stream. Although they do not perceive the much larger headphone and speaker segment of Beats Electronics to fit well into Apple's traditional product strategy, they do see a subscription service that could add a much needed touch of "soul" to Apple's distinctive product line. They believe Beats' current business model has the potential to add nearly $2B to revenue and $1.00 to their EPS estimate in FY15. In addition, at a very low take rate (~5%) across Apple's substantial user base (445M devices sold since 2011), the acquisition could quickly create a recurring revenue stream to eclipse the aggressive price at which the deal was cut.
- ISI Group notes that while this transaction is the single largest acquisition AAPL has consummated to date, it only represents ~2.2% of total net cash on the balance sheet as of March 31, 2014 (or ~10% of AAPL's domestic cash pro forma the most recent debt raise). Admittedly, the Beats deal by AAPL is a little bit of a "head scratcher" for them. However, they note this deal is simply a great way to add ~100bps (or ~$1.8bil) of incremental annual revenue to AAPL's base. They think this transaction makes sense for AAPL and our key concern is talent retention. They believe the highly anticipated iPhone 6 in 2H14 will be the "mother lode of all Apple upgrade cycles" $675 tgt.
- Oppenheimer notes the Beats acquisition has been widely anticipated for several weeks, so it won't be a surprise to any investors and its likely already worked into investor thinking and the share price. The keys to the deal are likely the creative leadership Apple is adding with Jimmy Iovine, brand-equity, and the streaming music service. Mr. Iovine's industry credibility and connections could be an asset as Apple works on content deals going forward and as it potentially enters new market segments. Beats Music is still emerging (small subs-base (<1M)/unproven monetization potential), but the technology/content could enhance Apple's own iTunes Radio platform. Apple has quickly ramped the number of iTunes Radio users, but it is yet to take much mind-share from competitors such as Spofity (~10M paying subs) and Pandora (~70M active users).