QVC-HSN Deal Looks Unlikely For Liberty

10/12/2007 8:00 PM Eastern

Liberty Media CEO Greg Maffei said at an industry conference last week that the Denver media giant has looked at a possible combination between its QVC cable shopping network and rival HSN, but there are several factors that would preclude any deal from happening in the near term.

Maffei, speaking at the Natixis Bleichroeder Hidden Gems conference in New York last Tuesday, said that he didn’t believe an HSN deal was imminent, adding that Liberty’s belief that IAC/InterActive Corp. stock is undervalued is the main hurdle to a deal.

Liberty owns a 24% stake in IAC and has discussed monetizing that interest several times over the years.

Maffei reiterated comments Liberty chairman John Malone made about a possible combination with HSN at Liberty’s investor conference in New York in September. At that event, Malone said that valuation was the main factor in preventing a deal, not antitrust concerns. QVC and HSN are the two largest cable shopping networks.

Comparison Shopping
Revenue growth: QVC vs. HSN
Period QVC HSN
*Excludes America’s Store, which IAC shut down in April.
SOURCE: QVC and HSN reports.
FY 20069%0%
1Q 20078%1%
2Q 20074%3%*

“IAC stock looks undervalued to us. It looks certainly numerically lower than in Q1 when we had our last big substantive discussions about this,” Maffei said, according to a webcast of the Natixis conference.

Maffei added that during that time HSN’s performance has declined. And given that IAC chairman Barry Diller would not be expected to accept anything less than a premium price for HSN, doing a deal at this point doesn’t make sense.

“We’re not happy carrying a minority stake, but over the long haul it would be difficult to imagine exchanging our stake for something that is undervalued,” Maffei said.

According to IAC’s second-quarter financial reports filed with the Securities and Exchange Commission, HSN reported revenue growth of 3%, up from 1% growth in the first quarter.

Maffei noted that excluding HSN, IAC grew revenue about 14% in the second quarter. Taking out Lending Tree, IAC’s online mortgage unit, and company revenue grew by about 18%.

Maffei estimated IAC stock is trading at a multiple of eight to 10 times cash flow.

“I don’t think Diller is going to sell at a six or seven times multiple,” Maffei said. “That’s a hard trade to make intellectually — going from the faster growing and selling into the slower growing. We’ll see.”

Maffei also talked briefly about Liberty’s new tracking stock — to be called Liberty Entertainment — which will house its 39% interest in DirecTV Group, and its full interests in Starz Entertainment, three regional sports networks, Fun Technologies and Wild Blue Communications when it is spun off later this year. Maffei said that Liberty had mulled including QVC in the Liberty Entertainment tracker. The shopping network is currently housed within Liberty Interactive.

Maffei said that he does not believe that the Liberty Interactive tracker has outlived its usefulness, but he added that it is not clear if the tracker is a long-term vehicle.

“Long-term, if we can’t reach a resolution with IAC and Expedia [another IAC holding], trying to get those things out of there and make Liberty Interactive a more focused pure operating company is interesting. That might involve a spin or not; we have no plans, but it could be interesting. I believe, probably more than John believes that there is an industrial logic and strategic value — you get benefits from cross synergy and promotion — of bringing DirecTV and QVC together. But we’re a bit away from that, not yet having closed on our 40% of DirecTV and certainly not being anywhere near towards having control of 100% ownership of DirecTV. I think John would be more likely to think that having separate equity for QVC that buyers could find attractive is more interesting than the synergy value, but we have creative tension and total disagreement about that.”

Maffei also confirmed reports earlier this year that Liberty was interested in bidding for international satellite giant Intelsat, mainly for the tax benefits the acquisition would supply. Intelsat was eventually sold to British private equity group BC Partners for about $4.6 billion.

At the Natixis conference, Maffei said that while there were some synergies especially between Intelsat and DirecTV, the main benefit of the deal was Intelsat’s Bermuda home base, which would have provided a valuable tax shelter for Liberty.

“Probably first and foremost is we loved the structure and having it in Bermuda allowed us to mark the assets with no gains and begin re-depreciating them and shield an awful lot of our taxes,” Maffei said. “That deal got John very excited.”

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