Navarre May End Up Keeping Funimation

Navarre's 3rd quarter (Q2 fiscal) earnings call earlier this week was quite revealing. They reported a quarterly profit of $1.7 million for the FUNimation division (now reported as “'discontinued operations'), vs. $435,000 in the year ago period. Now while that looks pretty good, keep in mind the year over year is up against the truly abysmal Q3 numbers everyone was turning in last year, and that during the 3rd quarter Funi has been doing everything possible, like liquidating a lot of surplus inventory, to help make their short term numbers look better in advance of a potential sale. Still, not too shabby.

Anyway, after going over the numbers, most of the questions asked during the Q&A were about Funi and how things are coming along with the proposed sale. Cary Deacon (CEO of Navarre) when asked about progress, said this:

"Yes we have had offers and indications of interest. We have gone through management presentations with those parties and some of those parties have come back with further rebids. At this point we’re analyzing those rebids and expanding our look at it."

After listening to him, it's clear to me that they are really not too far along with the sales process. Cary went on to say:

"The predesigned strategy that we’ve talked about earlier was to sell that asset and move forward with our distribution expansion strategy. However, we’re analyzing the value of selling that asset and whether that makes sense at this time based on the price levels and the indications of interest that we have. We’re not final in that process but we will very shortly decide whether the indications of interest and the ability to close a transaction is valid or whether we should continue to run FUNimation.

I’m pleased to tell you that (I think you’ve seen in the quarter) FUNimation continues to be run as if we’re going to own it. We’ve said from the get go that nothing is certain in life and we can’t just let FUNimation slide so we’ve done a good job of running FUNimation.

Would we like to sell it? That answer is yes, it’s part of our strategic plan; but we’re going to be very selective in that decision and decide whether it’s best to keep it or to sell it at the current levels of indication."

Cary said that by the end of December there would probably be an indication of whether or not Navarre will (or rather can) sell Funimation .

I don't think they are having much luck finding someone willing to make a big investment in this industry, and I repudiated the whole 'strategic plan' thing last May. The economy is still terrible, and raising money to fund a purchase like this has got to be next to impossible. Taken as part of the whole, Funi has gained truly impressive market share carving out about a 50% slice of the US Anime market. If you count only dubs, Funi is probably 85% of that market. But the days of the DVD business are waning, and when you ask someone in the industry how they plan to monetize their licensed content digitally - in a way that will show similar results to former DVD sales - well, no one has a clue. There are some bright ideas about how it 'might' be done, but it's going to cost a lot of money testing markets and delivery methods in order to figure it out. In fact, a lot of us (including me) are rather doubtful that it can ever be done. Right now, everyone's digital strategy seems to be to give the content away for free, hoping that the audience they are building will someday be converted into paying customers. Don't count on it.

So unless they find themselves willing to give Funimation away for a song, I think Navarre is going to be stuck with them, whether it plays into their 'strategic objectives' or not. Frankly, I still question to original premise for trying to separate the company. Rates are at 50 years lows, so Navarre should be able to refi it's debt through the market and let Funi keep adding to the bottom line.

And as a final thought, if they do end up keeping Funi, I want to just thank Cary for creating an incredible atmosphere of uncertainty in our business. As Funi goes, so goes the industry. We have been keenly aware of that more than ever in recent months, and so has the fan base.