At a recent investor conference, Scripps Networks Interactive CEO Ken Lowe addressed a frequently mentioned topic: corporate acquisitions and Scripps. Given Comcast Corp.’s reported play for NBC Universal, the popular speculation is that the Cincinnati-based company could be the next dish of chum coveted by media industry sharks.
“I keep saying that somebody sneaks into the yard at night and puts [up] a 'For Sale’ sign, and we get up in the morning and the place is not for sale,” Lowe joked at the conference.
Scripps Networks management has set its sights firmly on building up, not selling out. But that doesn’t mean the company isn’t wearing a large takeover bull’s-eye. Given the current economic climate, with large media companies regularly casting their lines for something profitable, the time seems ripe for Scripps’ assets to either be nibbled at or gobbled up whole.
It has been 15 months since the media company spun off from locally focused parent E.W. Scripps. In that time, it has expanded rapidly, buying up related Websites and rolling out around the world. Scripps Networks’ flagship services Food Network and HGTV are picking up viewers as consumers look for leisure activities closer to home. All of which has piqued the interest of rivals homing in on Scripps’ potential for growth in international, affiliate revenue, advertising and digital. The company, with a market cap of $6 billion, also owns DIY, the Cooking Channel (formerly FLN) and Great American Country.
Scripps charges cable system operators significantly lower fees compared to other entertainment networks for carriage of its services, meaning there’s plenty of room for affiliate revenue growth. And programming expenses are not driven by exorbitant talent demands, rights fees or the need to produce mass-audience hits.
Known for shows such as The Next Iron Chef and Rachael Ray’s 30 Minute Meals, Scripps has the benefit of owning practically everything it makes. Its service-oriented content can easily be broken down into segments that make content a natural for online and mobile exploitation. New iPhone apps for Food Network and HGTV are in the works. And on Oct. 5, the firm announced an advertising partnership with online how-to syndicator 5min.com that will see bite-size content placed and sold on related online venues.
“Having these cable networks and affiliate Websites that are truly focused on food and shelter play well to the future of media; it’s where targeted advertising is going,” says Lowe, in an interview with B&C. “If you look at Scripps and HGTV and Food and the flanking brands, we’re in the sweet spot.” The question becomes, how much other large media concerns like their sweets. At presstime, the stock price had hit a 52-week high on Oct. 8, reaching $38.24; a takeover could already be priced in, says one analyst.
CARRIAGE RENEWALS DUE
Arguably, Scripps management’s most important task is the renewal of its cable carriage contracts. At Food Network, 75% of distribution deals expire this year; Scripps will have to wait till 2011 to renegotiate with Comcast. Scripps signed 50% of carriage deals for HGTV in 2007 with Time Warner and Comcast, and is still negotiating with smaller players such as Cox, Charter and Insight.
Scripps won’t talk about pricing, but analysts estimate that cable operators pay between 5 and 9 cents a subscriber for Food, and 15 to 19 cents for HGTV. A cable industry source suggests a network of Food’s success should get more than double its present figure. A top-performing channel such as ESPN might gain $4 a subscriber by comparison. Food is estimated to bring in $568 million in revenue this year, according to UBS; its primetime ratings are up 19%.
“We do expect to be paid what the network is worth, and that’s a significant increase from what it is now,” says company CFO Joseph NeCastro. “There is one shot at this every few years, and you have to aim high.”
Beyond that, explains UBS analyst Michael Morris, “The opportunity at Scripps is in the ability to expand the company into markets outside the U.S. Cable network competitors see international markets as their brightest opportunity.”
After hiring former Discovery international chief Greg Moyer in December 2008, Scripps has made overseas expansion a priority. Earlier this month, Scripps announced a deal with Liberty Global division Chello Zone, which owns thematic cable channels around the world. Food Network is expected to launch in the U.K. in the next few weeks via British satellite operator BSkyB. Scripps will own a controlling interest in the venture, and Chello Zone will operate the service and roll it out around Europe, the Middle East and Africa.
With five main channels under the Scripps Networks umbrella, Lowe says the company’s sites are now also turned toward the growing opportunity of interactive. Scripps efforts online have not all been successes; the firm was forced in February to write down half the value of Shopzilla, the shopping service it had bought for $525 million. One notable exit from the company, on Sept. 29, is Deanna Brown, who ran Scripps’ interactive unit. For now, individual channel chiefs will figure out their online strategies until a replacement is found. Interactive services revenue was only $40 million in the second quarter, compared with $57.2 million in the year-ago period.
While digital is clearly a potential growth area, a few key acquisitions are also high priority. Scripps’ management team is keen to acquire the 31% stake of Food Network that is owned by Tribune Co. UBS’ Morris values that stake at around $812 million based on Scripps’ current multiple, which is 8.4 times 2010 earnings. NeCastro believes there will be little movement on that front until Tribune emerges from bankruptcy. “Then it will be a matter of price,” he says.
A BUYER OR A SELLER?
Goldman Sachs media analyst Mark Wienkes believes Scripps does not look like a company that wants to be bought. Along with that possible Food Network acquisition, Scripps is also a player for Cox Communications’ majority stake in Travel Channel, valued at between $700 million and $800 million. “We’d be remiss if we didn’t take a look,” Lowe says. “It’s a lifestyle category, and it fits in the vein of what we do.” Second-round bids are due mid-October; News Corp. is also reportedly among those interested.
Scripps’ channels have hardly been insulated from the advertising recession, but deep ties to the company’s branded entertainment integrations have made it harder to cut back on spending at the two big networks—which makes the company that much more enticing. In a 2008 Simmons multimedia engagement study for the full year, HGTV came out on top in adults aged 25-54 in response to the statement, “Watching this network inspires me to buy things.” Food Network ranked No. 2 among women of the same age.
“Food Network and HGTV continue to deliver audiences and compelling sponsorship opportunities for our clients,” says Harry Keeshan, director of national broadcast at agency Omnicom PHD.
Second-quarter ad revenue for the channels was $261 million, down 3.8% from the year-ago period. In a note in early September, UBS’ Morris wrote, “We are growing increasingly confident in the company’s ability to consistently identify popular content for its branded networks, and see a continued migration of viewers from broadcast into cable as a tailwind for revenue performance.”
Such confidence feeds Lowe’s desire to focus on growth. “We run these businesses to build shareholder value for the long term, and we think we can continue,” he says. “There is no focus on what might happen. We don’t really have those conversations. If you’re waiting for your phone to ring, you are not doing your job.”
That’s true, but it doesn’t mean Lowe doesn’t have a load of voicemail messages.