Extracting value from an unprofitable, dying business.
The world is a four dimensional place (the best know three plus the element of time). What filled a strategic directive yesterday may be needlessly sucking up critical assets today.
In the mid-1980’s Showtime Networks (SNI) setup a retail distribution business focused on servicing the underserved rural market by leveraging the established C-band satellite technology. The rub was that SNI couldn’t just sell its product. It had to provide a complete television channel lineup. Did it make sense to do this? Absolutely, for if SNI didn’t bring their service to this community no one would, HBO’s similar service certainly was not an option.
Well as you know in the late-1990s DBS can on the scene. With its better picture quality, less visually intrusive dishes and overall lower equipment cost it rapidly started to overtake the C-band market. It was time to re-examine this strategic business unit.
My task, conduct the business analysis and propose a solution.
Action: Reviewing the accounting statements showed that the business since day one generated a positive gross margin. Still, one had to question putting the committed level of support assets behind the operation, especially when the financial weight of this burden caused overall profitability to be negative.
I developed a market study and pro-forma financial model, the results of which supported the asset divestiture decision. It also revealed that:
- Most existing retail customers were videophiles with expensive in-home theater systems and would eventually switch to DBS packages
- Home theater equipment retailers install and service both C-band and DBS equipment
- Home theater equipment retailers were consolidating and would pay good money for customers
- Selling the business (list) with a guaranteed SNI content sales figure and eliminating existing support costs dropped more to the bottom-line
- A significant volume of assets could be freed and reallocation in support of the core business
Here are the actions I took:
Negotiated a bilateral asset sale and marketing partnership. Develop a “win-win” purchase structure that allowed both concerns to derive significant value.
Provided transition planning and support to ensure continuity of service from a consumer perspective.
Result: $54 million of value creation
- Locked in contractually guaranteed 5-year revenue stream, which fell directly to the bottom line, and generated $19 million in cost savings. Customers gained a smooth upgrade path and enhanced support.
- By being able to develop innovative analysis and shed new insights a better way came into light. This actionable information enabled the organization to profit from a declining business.