Would Scripps Sell Nets?

With a little more than one week of trading as a separate company under its belt, Scripps Networks Interactive (SNI) is once again the topic of merger speculation, with some analysts and observers predicting that NBC Universal could end up with the group of lifestyle cable networks.

SNI, which officially split from E.W. Scripps and began trading as a separate stock on July 1, has been the topic of merger speculation ever since the company announced the separation plans in October. And as the home of popular (and profitable) cable networks HGTV, Food Network, DIY, Fine Living and Great American Country, Scripps Networks could attract a price well above its market capitalization, currently about $6.5 billion.

While that would appear to be pricey — The Weather Channel last week agreed to be sold for about $3.5 billion, Oxygen Network for about $875 million — a look at SNI’s financials shows that it is not totally out of line.

Scripps cited its policy not to comment on speculation.

According to Scripps Networks financial documents, the networks tallied a $603.5 million combined segment profit (net income minus interest, income taxes, depreciation and amortization, divested operating units, restructuring activities, investment results and certain other items) in 2007, so a $6.5 billion deal would represent a multiple of 10 to 11 times segment profit. Historically, cable networks have been valued at cash-flow multiples between 10 and 14.

In announcing the split in October, Scripps said it expected SNI to record revenue of about $1.4 billion in 2008. E.W. Scripps, the unit that would house the newspapers and television-station assets, would generate about $1.1 billion in revenue, the company said.

SNI was expected to be the more growth-oriented company — its more established HGTV and Food would continue to generate steady revenue and earnings growth while niche networks DIY and Fine Living would provide more-robust growth opportunities as they gained carriage. And while the latter has happened — DIY and Fine Living have averaged 21% revenue growth since 2005 and have increased their combined available homes from 63.5 million to 93.8 million — HGTV and Food have managed to maintain a very healthy growth rate despite their “maturity.”

HGTV was launched in 1994; Food, in 1993. DIY and Fine Living launched in 1999 and 2002, respectively.

But according to financial documents filed with the Securities and Exchange Commission, since 2005, HGTV has averaged annual revenue growth of 15.4%, and Food Network has averaged 17.4%. At the same time, the two networks have brought in the bulk of SNI’s revenue, with HGTV accounting for $580 million and Food $476 million of the company’s $1.2 billion total in 2007.

And it is expected to get better.

Miller Tabak media analyst David Joyce said HGTV has enjoyed a ratings and advertising-revenue growth spurt despite the sluggish economy. “They have so many shows about how to create value in your home,” he said. “It went from flipping homes and new real estate transactions to what can you do with your space. That’s what’s made those shows more attractive to advertisers.”

Joyce believes that, because of those attractive metrics, SNI will be the target of strategic buyers, including NBC Universal and Time Warner. “[NBC has] spent $4.5 billion in the past six months,” he said. “They’ve bulked up their size so they can be more of the top echelon of their peers. It also helps make the NBC ratings weakness less of a part of the equation.”