Navarre Can No Longer Afford Funimation's Great Results...

If CMX's announced exit from the Manga market last week was equivalent to a hand grenade, this is a tactical nuke from orbit. From the Economatrix earlier today:

"Navarre Corporation has announced on Thursday that it has hired the investment bank Houlihan Lokey "to assist it in structuring and negotiating a potential transaction for the sale" of its Funimation anime arm. The plans may not result in an actual sale.

Navarre emphasized that "Funimation's recent results have generally met expectations," but CEO Cary L. Deacon said that Navarre will be focusing its strategy on its distribution and software publishing businesses. According to Navarre, Funimation plans to grow its business through "co-productions of original anime content, social networks and digital broadcasting," and those plans are best executed with another owner that has assets or expertise in those areas.

If the sale goes through, Navarre plans to present Funimation as a "discontinued operation" — a financial term for a segment of a company that has been separated from the rest of the company, or has been approved for separation — starting in the first quarter of the 2011 fiscal year. The first quarter runs until the end of June. Navarre will discuss its strategy in more detail during its June 4 year-end conference call for the 2010 fiscal year."

[Robert Bangs Head on Table]

On the upside, this could be interpreted as a 'Navarre Problem'. Funi is probably one of the few detachable divisions that Navarre could sell off to raise cash, so on the surface this move does not have to be about any sort of fundamental appraisal of the future of the R1 business.

But of course, it is.

I wish they had not said the thing about 'considering the directions Funi is going, it would be better off in someone else's hands'. That thought seems like pure spin. If digital content is the future, that should be exactly where they would want to be. So what if it doesn't jive with their other business units? Top management's job at any company is to look into the crystal ball and decide what they think the best allocation of available capital will be in the current business environment to maximize future returns.

So I think this is all about Navarre management's view of the future prospects of the R1 Anime industry (in any capacity - media, digital, etc.) against the deployment potential of that capital elsewhere - for them. And they will surely be selling Funi at a fraction of the $125 Milllion in cash and stock they paid Genji for it back in 2005.

Currently in the R1 industry, Funimation is the 800lb gorilla in the room. They own maybe 55-60% of the total R1 Anime market, with all the other players together carving up the scrapes. Plus, this move will put fully half the current available Anime catalog 'in play'.

Can they even complete a transaction in this market?
What will they do if they fail to sell it?
Will Genji stay once it's sold?
Will the business focus of a new owner be different?

I've got a headache this evening the size of Kansas.