232 COMSTOCK FOR SALE
June 23, 1999
Comstock is for sale. While the company is not named in the offering being
circulated in the financial community by Chase Financial Services, the
description can only fit Comstock. (For details of this offering see below.)
It is also a good bet, which we cannot confirm, that Visual Communications Group
is negotiating to acquire Comstock. We reported last week that there are rumors
in New York that VCG is about to make a major acquisition. Comstock would
Some sources have wondered why VCG would be interested in Comstock, but
Comstock's "royalty free" collection would give VCG the instant position in that
market that they have been earnestly seeking. In addition, they would have
the right to take many of the images Comstock has been licensing as "rights
protected" and convert them to "royalty free" because these images are wholly
owned by Comstock.
Another thing VCG and other major image suppliers like Getty and Corbis have been
trying to do is to find ways to hang onto a greater percentage of license fees,
and pay less out to the photographers. Comstock's wholly owned file is a perfect
opportunity to expand this strategy. VCG would keep 100% of any fees collected
from the sales of Comstock images.
The offering states that annual sales have averaged $13.2 million per year for
the last five years. It is our belief that this is only for the wholly owned
material which sources estimate to represent 80% to 85% of the file. Comstock
has some images on which they pay royalties to the photographers. Those images
are probably not included in the basic sale of the agency because Comstock can
not guarantee that those photographers will stay with the new agency.
Many in the industry have argued that in recent years Comstock's imagery has been
losing its "cutting edge" and that Comstock is no longer the industry leader it
once was. Even if that is true, it fails to take into account a couple factors.
First, they are making sales of $13.2 million per year and we believe the vast
majority are for "rights protected" uses. Obviously, there is a demand in the
commercial market for Comstock imagery.
It is our belief that this volume is larger than all but four other U.S. agencies
-- Tony Stone Images, The Stock Market, FPG and The Image Bank. While the
overall sales of Corbis Images is larger than $13 million the vast majority of
their sales are editorial and historical. Their penetration into the commercial
market is very small in terms of the overall percentage of their business.
The second factor is that in spite of the efforts by the major agencies to push
"cutting edge" images, there is still a great demand for classic, clean, cliche
images of the type that Comstock has a wealth of in their files.
Because the images are wholly owned the new company can, either sell them for
less and undercut their competition who has to pay percentages to photographers,
or match the competitors price and take home a lot more profits.
VCG also has an advantage because they could close most, if not all of the
Comstock offices and transfer the sales to their existing operation. One
indication that this might be the strategy they will pursue is that management
level people have recently been let go in Comstock's Berlin office. There have
been no indications as to who their replacements might be.
One weakness in the Comstock operation, from the VCG point of view, may be their
"royalty free" customer's list. Comstock hasn't been in the RF business all that
long and most people feel their client list for this type of work would be weak.
While there is overlap between the traditional "rights protected" clients and the
RF, most suppliers indicate that there are also quite a few differences. On the
other hand, VCG probably has little other option to get a better list so they are
likely to accept what they can get.
Other Possible Buyers
I would also expect Corbis to take a look at this opportunity. I believe they
could use a much stronger offering in the "commercial" area. Even if Comstock
has gone down hill quite a bit in the last few years, it could still offer quite
a bit of improvement to the
"commercial" side of Corbis' file. The wholly owned aspect could be a plus and
access to Comstock's client list could be of real value if Corbis were to take
full advantage of what is there. Comstock coupled with WestLight could put them
in a much better position to compete with TSI and the other commercially oriented
But, Corbis may be so busy patting themselves on the back for their recent Sygma
acquisition that they won't take time to look at this opportunity.
Zefa in Germany might also be an interested buyer, but German sources tell me
that while Zefa could easily afford to buy Comstock the logistics of integration
of such an acquisition in the Zefa system are more than they would like to take
on at the present time.
As always, the losers in this are the photographers. There is a big question as
to what will happen to the Comstock photographers who own the 15% to 20% of the
imagery that is not wholly owned by the agency. Initially, they will probably be
given the option to have their existing work licensed by the new owners, but will
those owners accept new work?
FPG has been cutting back on the number of photographers they represent. It will
probably be tough for Comstock photographers to work their way into the new
The FPG photographers, on the other hand, have different issues of concern.
There will be a great temptation at FPG to put a lot of wholly owned Comstock
images into future FPG and Telegraph catalogs. That means fewer slots for FPG
and Telegraph photographers.
And the question still remains, who will be running the FPG operation. It seems
unlikely that would be Henry Scanlon because he probably doesn't want the job.
Chase Financial Services Offering
Project Photo Op
"Chase is acting as an exclusive financial advisor to a privately held US company
(the "Company") on the potential sale of its business. The Company,
headquartered in New York City, produces and sells both "rights protected" and
"royalty free" images to customers in all 50 states and has wholly owned offices
in Toronto, London, Paris and Berlin. The Company has made significant
investments in the royalty free segment and is now one of only a few firms in the
industry that has meaningful offerings in both segments of the market. The
agency's proprietary image collection (the "Collection") is comprised of
approximately 725,000 high quality, wholly owned images.
"The Company was a pioneer in the stock photography industry and has developed a
reputation for producing the highest quality market targeted commercial imagery
currently available in the market. The Collection represents the edited best of
over five million photographs that have been produced by the Company over the
past 24 years. Unlike other agencies, which generally do not own the material
they sell and must pay photographers up to 50% of fees earned, the Company owns
its collection in its entirety and, as a result, retains 100% of the sale price.
Ownership of its images means that the Company has absolute freedom to move its
entire collection from rights protected to royalty free at will.
"Additionally, the Company's form of release contract (lifelong use, reuse, no
exclusions/special arrangements) does not restrict its use to a particular
medium, enabling the Company to easily transition its collection from photograph
to CD-ROM to the Internet. This flexibility would allow the Company to instantly
create the largest and highest quality royalty free product line in the industry.
To facilitate this expected conversion to a primarily E-commerce based platform,
the Company maintains a state of the art, fully functioning web site that is
already generating revenues.
"The Collection is supported by over 3,200 signed model releases. The integrity
which this provides to the Collection has, in the Company's view, insulated it
from claims related to litigation brought by models arising from unauthorized or
illegal use of their image, a significant liability exposure for the industry.
"The Collection represents an excellent fit for industry competitors; or for an
Internet/Portal/E-commerce enterprise wishing to acquire a "turnkey" high end
photographic content capability, to be used as either its own revenue generator
or a traffic generator. Management believes that access to this Collection of
high quality images can propel even a new entrant into the upper echelons of the
industry. Notwithstanding the Company's significant investment in content to
support its offerings and develop a meaningful royalty free capability, revenues
and adjusted EBITDA for the years 1994 - 1998 averaged approximately $13.2MM and
$2.4MM, respectively (suggesting an adjusted EBITDA margin of 18.5%)."