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California-based online digital photo storage and printing company, Shutterfly, Inc. (SFLY - Analyst Report) reportedly attracted bids from a number of private equity firms including Hellman & Friedman LLC, Bain Capital LLC and Silver Lake Partners LP.

Market rumors indicate that the photo storage company might be valued at roughly $2 billion in sale. Shutterfly has been looking for a buyer for some time now and had reportedly hired boutique investment bank Qatalyst Partners LLC in July this year to find buyers. Further, reports indicate that a deal could be completed in early September.

Shutterfly's main business allows customers to store photos digitally and make printed albums, posters, coffee mugs and other products using them. Thus, the company was considering private-equity firms, e-Commerce companies and web storage businesses for a possible divestment.

We believe Shutterfly is principally attractive to private equity firms because of the massive inventory of Kodak Gallery images it bought in a bankruptcy auction from Eastman Kodak Co. in 2012. According to media reports, the deal added nearly nine billion images to Shutterfly's photo library.

The decision to sell the company comes in the wake of back-to-back losses incurred in the first two quarters of 2014. Shutterfly’s business is highly seasonal and the company generally posts losses in the first three quarters of the year.  

Other than seasonality, termination of the Costco partnership in 2013 affected Shutterfly’s profits to a great extent. Apart from this, depreciation, labor and equipment costs for expansion and acquisition of manufacturing facilities further dented profitability. In fact, the company expects the bottom line in the range of a loss of 11 cents to earnings of 20 cents for 2014, compared with 38 cents earned in 2013.

Moreover, the company faces stiff competition from major players such as Google Inc. and Facebook, Inc. (FB - Analyst Report) who have been acquiring companies in the technology and Internet space. These companies have better and effective resources to leverage these buyouts and would eventually eat into Shutterfly’s market share. Further, Hewlett-Packard Company’s (HPQ - Analyst Report) Snapfish and Apple Inc.’s (AAPL - Analyst Report) iPhoto make it difficult for Shutterfly to gain market share.

Shutterfly, currently, has a Zacks Rank #3 (Hold).

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