Sonic to buy DivX for $ 323 million

Bangalore: Digital media company Sonic Solutions agreed to acquire video compression software maker DivX Inc for about $ 323 million in cash and stock, to boost its Internet-based video delivery products.

The deal will help Sonic, known for its Roxio digital media players, expand its relationships with retailers and consumer electronics manufacturers.

The deal valued DivX's stock at about $ 9.83 per share, a 41 percent premium to its Tuesday closing price of $ 6.95.

However, Avondale Partners analyst John Bright said market activity suggests shareholders believe the deal overvalues DivX. Shares of Sonic fell as much as 14 percent Wednesday.

The offer values DivX at about 65 times 2010 earnings estimates, more than four times the multiple of the wider software services industry.

DivX shares, which have gained 43 percent in value in the past six months, rose as much as 30 percent to $ 9.02, but were trading at $ 8.68 early afternoon.

Sonic will pay $ 3.75 per share in cash and 0.514 shares for each share of DivX. DivX will have to pay a fee of $ 8.35 million in case of termination, the companies said.

Strategic fit

However, some analysts see DivX, best known for its codec software that helps users watch videos across different media players, as a good fit for Sonic.

"With Sonic - with its relationship with distributors - (the deal) adds to the three legs of the stool, which will be the content, the distribution and the consumer electronics side of it," Maxim Group analyst Mark Harding said.

Sonic, provider of the Roxio CinemaNow online movie and TV distribution service, is developing a Web-based infrastructure that will let studios and retailers sell movies and television shows directly to consumers.

It also has a tie-up with technology retailer Best Buy Co Inc for online movie downloads.

In 2009, 70 percent of DivX's revenue came from licensing its technology to original equipment manufacturers, original design manufacturers and integrated circuit manufacturers.

Last year, Samsung and Sony Corp accounted for 13 percent and 12 percent, respectively, of DivX's revenue.

DivX's rivals include Apple, Adobe Systems, Google, Microsoft and RealNetworks.

Sonic expects the acquisition, which is scheduled to close in September, to help the combined company to post earnings of more than 40 cents per share, before items, on revenue of $ 250 million in its fiscal 2012.

The companies also expect some operational cost savings as both of them are from the same industry, the companies said.

For the fourth quarter ended March 31, Sonic said it earned 4 cents a share on revenue of $ 26.4 million.

Sonic forecast first-quarter revenue of $ 25 million. This falls short of analysts' expectations of $ 26.5 million.