HSN: A Future Bargain?

There have been a lot of articles and blog posts recently regarding the split-up of IAC/InterActiveCorp (IACI). Basically, IAC is an internet/retail/media conglomerate that has been trading at a discount because of its complexity. Last Monday, Barry Diller announced that IAC will be splitting up into 5 separately traded public companies. I won’t go into too much detail as it has been discussed more thoroughly elsewhere. (A few good descriptions can be found here and here).

The two divisions that I’m most interested in as businesses are HSN and Ticketmaster. Below I go over HSN in more detail. Out of all five, I think that (depending on timing) HSN, Interval and LendingTree will have the most downside pressure once spun off.

I don’t know much about LendingTree. But with what’s going on in the housing and mortgage sectors right now, investors will probably dump it in favor of IAC’s more desirable properties. Namely Ticketmaster and the IAC internet properties.

Home Shopping Network

HSN

The Home Shopping Network (HSN) is the largest division of IAC in terms of sales. Out of the businesses that IAC currently owns, HSN was also the first to be acquired by Barry Diller. It sells a variety of products over the air, 24 hours a day, in over 89 million homes across the world. HSN has a 30% share of the home shopping market, with QVC(owned by John Malone/Liberty Media) and ShopNBC accounting for the other 60% and 10%, respectively.

Both HSN and QVC have high profit margins relative to other resellers of merchandise. HSN however, has never been able to match QVC in terms of margins or sales growth. This could be a factor of poor execution, or just economies of scale—this is a very high fixed cost business, and QVC has always been the market leader. As of last year, QVC had EBITDA-CapEx margins of about 20%, versus HSN’s 9%.

Below is a brief history of HSN—its involvement with John Malone/Liberty Media, and how it transformed into IAC.

  • < 1992 – Liberty Media owns a controlling stake in QVC, which is run by Barry Diller.
  • 1992 – Liberty buys a 23% stake in HSN.
  • 1995 – Diller resigns from QVC and buys Silver King Communications (small TV broadcaster).
  • 1995 – Diller uses Silver King to purchase HSN (Silver King itself was previously spun-off from HSN 3 years earlier—see the section in Joel Greenblatt’s ::amazon(“0684840073″,”You Can Be a Stock Market Genius”)::).
  • 1995 – After the deal, Liberty controls 39% of the combined company, and Diller owns 20%.
  • 1997 – HSN buys controlling interest in Ticketmaster.
  • 2003 – Parent company of HSN changes name to IAC/InterActiveCorp.

I’ve left a lot of details out in the intervening years. Needless to say, both IAC and HSN have very complicated histories. The breakup of the modern-day IAC is nothing new for Barry Diller. Hopefully under the new structure, Diller will focus more on operations rather than the buying and selling of other companies. But if history is any judge, I doubt that will happen.

Over the past year, HSN hasn’t performed very well. EBITDA margins have fallen from about 12% in 2005, to 10% last year, to this year’s estimate of just over 8%. But there is hope for more normalized earnings in the long-term. Executives in IAC’s most recent conference call said that HSN is already showing improvement as of the last quarter.

This is why, assuming it continues to underperform in the short-term, there is the possibility that HSN will be undervalued after the split-up. Retail has been beaten down lately and HSN is no exception.

At the beginning of the year, John Malone and Barry Diller were in talks to trade Malone’s stake in IAC for the HSN business and further cash payment. But because of the recent underperformance, Malone decided against the trade. This is one reason why the split-up is so interesting for HSN. Despite Malone’s controlling interest in IAC, under their agreement Diller calls all the shots. But that doesn’t mean that Diller doesn’t want Malone off his back. The split-up could pressure Malone into an asset trade for HSN, or even better for shareholders, allow him to purchase HSN for a higher price once it’s separately traded.

ValueVision Media

Although HSN may present an opportunity down the road, I think one of its competitors is an even better opportunity now. ValueVision Media (::yahoo(“VVTV”)::) is the parent company of ShopNBC, which as I stated above is the smallest of the three home shopping companies. Because of its size and the large operating leverage inherent in the business, ValueVision has lost money for years. If sales continue to grow however, profits will eventually overcome fixed costs and margins should move up those of HSN’s.

A recent analyst estimate pegged the value of ValueVision’s assets at $7 per share. This figure assumes the company ceases to be a going concern, and hence doesn’t include their 850k customer base or large Net Operating Loss reserves. With the stock trading for less than $5 a share, I think ValueVision has a lot of potential. Hopefully I’ll have time to write up a more detailed post on ValueVision in the next few weeks.

Disclosure: VVTV is the only stock mentioned in this post that I own. This is not a recommendation to buy or sell any security.

9 thoughts on “HSN: A Future Bargain?

  1. Max,

    Nice to see a post about the home shop nets. All of them are very neglected by the investor community for various legacy-related reasons (the taint of their infomercial past). What is not readily understood is that each of these TV Shop Nets have some very interesting strengths:
    1) The high fixed cost operating expense is the result of the fact that they all pay the cable/satellite operators for thier carriage into homes. I estimate that QVC/HSN pay in the neighborhood of $175-$200M/year and ShopNBC $124M/year for that carriage. (ESPN, CNN etc do not pay for carriage; for those who complain about their cable/satellite bills…they should be thankful the Home Shop Nets are there or they would pay more)
    2) These 3 home shop nets all derive 21%+ of their sales from the Internet. In fact they are all ranked in the top 100 of Internet Retails Top 500 ranking of Internet Retailers. (Amazon is #1; QVC #12; HSN #24; ShopNBC #64)
    3) Once sales at the home shop nets reach scale to cover their fixed fee…the margins are large (as you note). QVC at 20 is more than 2x’s Amazon’s margin.
    4) Internet Video is all the rage. High quality video production with salesmanship is exactly what these home shop nets have been doing since at least 1990 (Valuevision/ShopNBC). Many etailers would agree that high quality internet video is becoming a must-have. Who better to capitalize on that trend…and it costs them almost nothing vs the web only retailers who need to invest considerable $ and time to figure it out.
    5) The FCC regulates the cable industry and is on the war path. It is possible that they could enact rules later this month that could allow for a 50% reduction in carriage fees paid by the home shop nets (specifically impacting Valuevision….which overnite could see EBITDA grow to $50-$60M on flat sales growth)
    6) The barrier to entry is very high for any company to enter the home shop space vs a very low barrier to enter the etail space.

    There are many other reasons to not overlook the homeshop nets; I look forward to your further review of Valuevision…particularly if the FCC rules are passed 11/27/2007.

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  2. Davo,

    Those are some interesting points about the home shopping companies. The internet side of the business is very interesting.

    It’s hard to tell how many customers buy on the web but “shop” on TV (in other words, they watch HSN, and then go buy their products on the internet). I’d say only a small percentage of their internet sales are customers who ONLY shop online. But the good part about these customers is that they’re incremental revenue that doesn’t cost nearly as much as the TV side. The more people who are willing to shop with live internet video the better. As you said, its extremely cheap for them relative to the cost of broadcast licenses.

    -Max

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  3. Max,

    Watch for news from ShopNBC later this month and into December. They will be launching new .TV features/functionality including web casts that can be viewed whenever the viewer wants to view it. That means ‘live’ and not-so-live broadcasts to meet the schedules of current and prospective customers.

    Also, if the FCC rules to slash leased access, VVTV’s shares could soar…reflecting future EBITDA in the $60M+ range near term.

    Lastly, VVTV currently trades at less than $2/home. QVC as example was valued at $142/home in 2003 when Comcast sold its share to Liberty. ShopNBC sales are about 15% of QVC’s BUT ShopNBC’s distribution is 27% less than QVC’s. If that balances it out a bit, VV’s homes should be valued @$21/Home….that equates to about $40/s. If the FCC rules favorably….

    I digress. All of the home shopnets are not well understood by the investor community. Diller & Malone both know the value inherent in H and Q respectively which is why they have been involved with them for so long; and I am convinced that both of them think there are better days ahead for the homeshopnets.

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  4. Davo,
    ShopNBC’s site is impressive – much more so than HSN’s or QVC’s. I’m sure customers who shop on the internet vs. TV spend more, as it seems much easier and more user friendly. If I were VVTV, I would also provide even more incentive for customers to shop online (like lower S&H, etc.). Another thing to take into consideration is that VVTV’s consumers are more higher end than HSN/QVC, which provides advantages and disadvantages.

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  5. Max,

    VVTV’s Q3 call is worth a listen.

    They did not provide 2008 guidance but I will predict here:

    2008 EBITDA $32M on 7.5% sales growth
    2009 EBITDA $100M on 7.5% sales growth (analog goes digital)

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  6. Davo or Max,
    Any new thoughts on HSN / LINTA / VVTV? Have there been any changes in the marketplace or competitive landscape due to Carriage Costs etc?

    Like

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