Thursday, May 27, 2010

Navarre Can No Longer Afford Funimation's Great Results...

If CMX's announced exit from the Manga market last week was equivalent to a hand grenade, this is a tactical nuke from orbit. From the Economatrix earlier today:

"Navarre Corporation has announced on Thursday that it has hired the investment bank Houlihan Lokey "to assist it in structuring and negotiating a potential transaction for the sale" of its Funimation anime arm. The plans may not result in an actual sale.

Navarre emphasized that "Funimation's recent results have generally met expectations," but CEO Cary L. Deacon said that Navarre will be focusing its strategy on its distribution and software publishing businesses. According to Navarre, Funimation plans to grow its business through "co-productions of original anime content, social networks and digital broadcasting," and those plans are best executed with another owner that has assets or expertise in those areas.

If the sale goes through, Navarre plans to present Funimation as a "discontinued operation" — a financial term for a segment of a company that has been separated from the rest of the company, or has been approved for separation — starting in the first quarter of the 2011 fiscal year. The first quarter runs until the end of June. Navarre will discuss its strategy in more detail during its June 4 year-end conference call for the 2010 fiscal year."

[Robert Bangs Head on Table]

On the upside, this could be interpreted as a 'Navarre Problem'. Funi is probably one of the few detachable divisions that Navarre could sell off to raise cash, so on the surface this move does not have to be about any sort of fundamental appraisal of the future of the R1 business.

But of course, it is.

I wish they had not said the thing about 'considering the directions Funi is going, it would be better off in someone else's hands'. That thought seems like pure spin. If digital content is the future, that should be exactly where they would want to be. So what if it doesn't jive with their other business units? Top management's job at any company is to look into the crystal ball and decide what they think the best allocation of available capital will be in the current business environment to maximize future returns.

So I think this is all about Navarre management's view of the future prospects of the R1 Anime industry (in any capacity - media, digital, etc.) against the deployment potential of that capital elsewhere - for them. And they will surely be selling Funi at a fraction of the $125 Milllion in cash and stock they paid Genji for it back in 2005.

Currently in the R1 industry, Funimation is the 800lb gorilla in the room. They own maybe 55-60% of the total R1 Anime market, with all the other players together carving up the scrapes. Plus, this move will put fully half the current available Anime catalog 'in play'.

Can they even complete a transaction in this market?
What will they do if they fail to sell it?
Will Genji stay once it's sold?
Will the business focus of a new owner be different?

I've got a headache this evening the size of Kansas.


ザイツェヴ said...

Did you look at the garbage Funi keeps licensing despite the bragging about "fist look"? Some gorilla that is. Gorillas are among the most intelligent species.

Starcade said...

Devastating news for the industry, because, basically, this can only be interpreted as one of two results:

1) Piracy/fansubbery has made the anime industry so non-profitable in perpetuity that a company (Navarre) stated reliant on the industry (Funimation) to keep it afloat can no longer stay in the game.


2) Navarre is finally folding up it's tent once and for all and is going to use the sale of Funimation to wind it (Navarre) down as a going concern.

This AND the news from Viz last week about cutting 40% of it's workforce in the US basically puts the entire mainstream US anime industry in play.

And I don't like the options.

Basically, the best option would be something like this Geneon Universal situation, coming in and taking over -- the problem with that is that the Japanese have basically thrown in the towel on the US market.

What I see (especially with where the real VC money has been going the last two years) is a much more ominous situation:

CrunchyRoll and the pirates get it all.

Starcade said...

Your four questions:

1) Can they complete a transaction in this market?

My guess is "no". I do not believe they will find a buyer (hence, my CrunchyRoll fears).

Right now, frankly, I'm not sure that Funi's 2009 share of the market was more than about $70M as it is, so how anyone would want to pay any reasonably high price for Funimation, in an abjectly disintegrated sales market, if it's clear that the pirates and thieving fans have material ownership over the licensed product?

This is why you are seeing the VC money going to same pirates, thieves, etc.

Which leads me to:

2) What will they do if they fail to sell it?

Liquidate. My sense is that CrunchyRoll would basically take the licenses, and the rest of the operations (including all dub-work/studios/etc., at that point) would be effectively discarded/sold at auction.

If they fail to sell it, CrunchyRoll will probably end up the One to Rule Them All. And, at that point, I become Evening News-fodder. Again.

3) Will Genji stay once it is sold?

If a buyer is found with deep enough pockets, I could even see a consolidation with Viz US interests for one remaining company, and I think Fukunaga would stay in that scenario.

If no buyer is found, he's obviously gone, because the entire sale model for anime will be of about as little use as I think it is.

4) Will the business focus of a new owner be different?

Has to be. In fact, the business focus of the new owner might well be sub-only straight off the top.

Unknown said...

Starcade, you're blowing it again. They are still the most profitable name in the R1 industry. Clearly, Navarre has a different direction in which they're going. I think some group will end up buying FUNi eventually; otherwise, getting together with Viz USA, Right Stuf or Media Blasters (I cringe) will be the way they go.

Geez, such a pity party here, especially with the "fansubbery" card being played so blatantly. Think practically on this.