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Scripps Networks Seen Luring Disney as Trust Disbands: Real M&A

Scripps Networks Seen Luring Disney as Trust Disbands: Real M&A
Ken Lowe, president and chief executive officer of Scripps Networks Interactive Inc., leaves the morning session at the 2012 Allen & Co. Media and Technology Conference in Sun Valley, Idaho. Photographer: Scott Eells/Bloomberg

Scripps Networks Interactive Inc., the television home of Paula Deen’s mashed potatoes, is poised to lure bids even with the stock at a record high now that the controlling family trust has disbanded.

The owner of the Travel Channel, HGTV and most of the Food Network has the second-fastest projected sales growth through 2015 among 13 U.S. media companies valued at $1 billion or more, according to data compiled by Bloomberg. Scripps Networks, which split from E.W. Scripps Co.’s newspaper assets in 2008, also offers the industry’s highest return on assets at 14 percent.

The $9.5 billion corporation’s revenue outlook justifies a premium of 30 percent or more, according to Carne Capital LLC. Edward Jones & Co. said buyers will likely emerge given the end last week of the Edward W. Scripps Trust, which had 93.5 percent of the voting rights. Walt Disney Co., owner of sports network ESPN, should be drawn to Scripps Networks as a way to add more female-friendly content, said Citigroup Inc. and Macquarie Group Ltd., which also sees Time Warner Inc. as a potential acquirer.

Scripps Networks “probably belongs in a larger entity,” Amy Yong, a New York-based analyst at Macquarie, said in a telephone interview. The dissolution of the family trust last week “puts Scripps into play,” she added. “Anyone who doesn’t have kind of female-centric or lifestyle-centric content would want to own this.”

Mark Kroeger, a spokesman for Scripps Networks, declined to comment on whether the company had been approached by any buyers or would be open to a sale.

Cleveland Roots

Scripps Networks traces its roots to 1878 when Edward W. Scripps founded the Penny Press in Cleveland. In 2007, newspaper owner E.W. Scripps Co. decided to split off its cable-television assets, and the new company, known as Scripps Networks, became publicly traded the next year. The channels owned by Knoxville, Tennessee-based Scripps Networks -- HGTV, the Travel Channel, DIY Network, the Cooking Channel, Great American Country, and 69 percent of the Food Network -- focus on topics such as cooking, gardening, housing and travel.

The family trust is being dissolved because of the death of Robert P. Scripps, a grandson of the founder, according to an Oct. 19 statement. The trust’s holdings, including 28.4 percent of Scripps Networks’s publicly traded Class A common shares and 93.5 percent of the voting shares as of Sept. 30, will now be distributed to descendants of Edward W. Scripps.

Fees, Advertising

Cable-channel owners such as Scripps Networks generate revenue through two primary sources: fees from pay-TV operators such as DirecTV and Comcast Corp. that carry their stations, and advertising sales. Companies like Scripps Networks and Viacom Inc., which owns MTV and Nickelodeon, negotiate fees for their networks in bundles and rely on selling high volumes of advertising since they usually receive lower rates than big broadcast networks such as CBS Corp. and News Corp.’s Fox.

Scripps Networks’s content is “all pay-TV-based, so that in and of itself I think is a very attractive business model because you’re getting paid for that subscription fee -- very recurring revenue -- in addition to advertising,” Robin Diedrich, a St. Louis-based analyst at Edward Jones, said in a phone interview.

Scripps Networks is offering potential buyers one of the fastest growth rates in the industry. Revenue will increase 23.9 percent between 2012 and 2015, according to the average of analysts’ estimates compiled by Bloomberg. That’s faster than 11 of 12 similar-sized U.S. media peers, trailing only Discovery Communications Inc.’s 24.1 percent rate, and compares with a median of 14.8 percent, the data show.

Diners, Dives

The company, with shows from Deen’s “Paula’s Home Cooking” to “Diners, Drive-Ins and Dives” and “House Hunters,” is also proving more effective at generating profits off its assets with its return on assets of 14 percent, more than double the peer median of 5.9 percent.

Shares of Scripps Networks had risen 50 percent in 2012 through yesterday, reaching a record high of $63.72. Today, the stock lost 2.1 percent to $62.36. Given the company’s growth potential and the value of its content, any buyer would have to pay a premium of at least 30 percent to strike a deal, said Sean Bonner, chief investment officer at Radnor, Pennsylvania-based Carne Capital, which oversees about $65 million including Scripps Networks shares. Based on yesterday’s close, that would value it at $82.84 or more.

“As a shareholder, I would demand a steep premium because I think this is a great business,” Bonner said in a phone interview. “Any bigger company that’s looking for content and content that provides a great return on assets” would want Scripps Networks, Bonner said.

Worth More

Jerome Dodson, president of San Francisco-based Parnassus Investments, which oversees about $6.7 billion including Scripps Networks stock, said the company could attract bids of about $80 a share or more. Scripps Networks is worth more than its current price because of its projected growth, he said.

Jason Bazinet, a New York-based analyst at Citigroup, wrote in an Oct. 19 note that Disney of Burbank, California, may be drawn to Scripps Networks to fill a “yawning gap” in its programming: “upscale, older women.” The $92.9 billion company caters to children with the Disney Channel, teens with comic-book division Marvel, and men with ESPN, while Scripps Networks tends to attract women older than 49, Bazinet said in a separate report from Aug. 13.

Macquarie’s Yong agreed that Disney may be interested. She also identified New York-based Time Warner, whose holdings include cable channels HBO, CNN and TBS.

Another possible bidder is Philadelphia-based Comcast, which purchased a cable-TV system from E.W. Scripps Co. in 1996, said Carne Capital’s Bonner. Comcast acquired control of NBC Universal in 2011, adding networks from CNBC to USA Network to the company’s existing cable delivery system.

Disbanding Trust

Michelle Bergman, a spokeswoman for Disney, didn’t respond to a phone message or e-mail seeking comment on whether the company would be interested in buying Scripps Networks. John Demming, a spokesman for Comcast, and Keith Cocozza, a spokesman for Time Warner, declined to comment.

Now that the Edward W. Scripps Trust has been disbanded, these larger companies may be more willing to bid on the company, Dodson of Parnassus said.

Cable-channel owners such as Disney may have been deterred from making an offer “because they just didn’t think it was in play,” Dodson said in a phone interview. The dissolution of the trust “certainly does open the possibility of selling to an outside entity.”

The process may make it easier for a buyer to acquire the company, Edward Jones’s Diedrich said.

More Deciders

Control “seems to be spread out” and “more decision makers have input into the process,” she said. “It certainly seems to be more likely that if someone were to make a great offer, that you could see more pressure from certain beneficiaries that maybe are in favor of selling.”

Still, owners of shares that the trust held face restrictions on the sale of stock: No one can sell without first offering them to the rest of the beneficiaries and Scripps Networks, according to filings with the Securities and Exchange Commission. The group will continue to elect a majority of board members, according to last week’s statement.

Scripps family members may not be motivated to sell, given the trust’s success at guiding the company to profitability in the past, said Tom Russo, a partner at Lancaster, Pennsylvania-based Gardner Russo & Gardner, which oversees more than $5 billion including Scripps Networks shares. The company’s revenue rose 34 percent in the past two years.

‘Enormous Things’

“Anyone who’s been involved with the family knows that by having the capacity to keep those share votes together, they’ve been able to accomplish enormous things,” Russo said in a phone interview. “They’ve advanced their finances better than just about any other family trust that you could see, and knowing that, they would be well advised to think of other ways to somehow duplicate it.”

A high enough offer may be too tempting for both management and family members to refuse, Carne’s Bonner said.

“Winning makes for great chemistry and I think for shareholders, the same is true,” he said. “Getting a sizable return on your investment makes for great chemistry.”

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