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Outerwall strikes gold for shareholders with $1.6B Apollo deal, analysts say

's plannedsale to affiliates is a good deal for shareholders of the Redbox Automated Retail LLC parent company, but itsvalue for the private equity buyer is less apparent, analysts said.

Outerwall,which also operates Coinstar coin-counting kiosks and ecoATM electronics recyclingkiosks at retail locations, has seen a decline in its Redbox movie disc rentalbusiness and has struggled to pivot as consumers turned more to digitalcontent, industry observers noted.

Outerwallagreed to be bought by affiliates of funds managed by Apollo for $52 per sharein cash, representing a total enterprise value of about $1.6 billion, includingnet debt, the companies said July 25. The purchase price represents a premiumof about 51% over Outerwall's closing price of $34.39 on March 14, immediatelybefore the announcement that its board was exploring strategic and financialalternatives for the company.

S&PGlobal Market Intelligence analyst Tuna Amobi called the deal price "arich premium" for shareholders. "Private equity companies are alwayson the hunt for deals in which companies can generate cash flow, even if it isin decline," he said in an interview.

Thetransaction has been unanimously approved by Outerwall's board and is expectedto close in the third quarter, subject to the completion of a tender offer aswell as regulatory and other customer conditions. Following the deal, Outerwallwill become a privately held company and its shares will cease to be listed onthe public markets.

Activistinvestor Engaged Capital had been pushingfor the company to consider different financial options, including goingprivate. Engaged Capital reached an agreement with Outerwall in April toappoint three new directors to the company's board, including Jeffrey Brown,CEO and founding member of Brown Equity Partners, whose term began immediately.

"Outerwallwas true to its word that it would explore options, which have resulted in amore than fair return for the business and its shareholders," said StevenFrankel, an analyst with Dougherty & Co., in an interview.

Frankelsaid that while Apollo obviously believes Outerwall's assets can produce enoughcash flow to justify the transaction, questions remain about "what to dowith a business that is very challenged at its core."

Redboxnot only faces hurdles tied to the inherent volatility of movie box officeresults but also from declining consumer interest in DVDs overall and aproliferation of streaming services, Frankel said. Rentals from Redbox kiosksdeclined to 137.7 million in the first quarter, compared to 173 million in thesame period of 2015.

"There have been three/four consecutive quarters withnegative same-store results. That suggests they are in decline," saidWedbush Securities analyst Michael Pachter.

Pachter said Apollo is purchasing Outerwall at 3.5x EBITDA,which he called a good price. He believes it will take Apollo three to fouryears to get its money back. "If the revenues keep contracting, they won't,"he added.

Asto ecoATM, Frankel noted that major wireless carriers and all have their own trade-inprograms, and "people are keeping their smart phones longer."

Analystsalso were skeptical about a new transactional digital video-on-demand andelectronic sell-through offering that Redbox is . The venture would mark thecompany's second foray into the streaming service business. Redbox Instant, ajoint venture with VerizonCommunications Inc., was shuttered in late 2014 less than two yearsafter its launch.

Frankelsaid Redbox may be "a little late" to this arena. "It remains tobe seen if this could become a meaningful new business. There are already well-entrenchedplayers."

Outerwallis scheduled to release its second-quarter earnings after the market closes onJuly 28.