The deal market suddenly came alive this week when Scripps Networks Interactive agreed to pay about $1 billion for the Travel Channel, nearly twice the estimated value of the network when its auction began almost five months ago.
And though the price appears to be a healthy one — early valuations on the channel were in the $600 million range — not everyone is convinced that the deal represents a return to the robust valuations of earlier in the decade.
According to SNI, Travel Channel was valued at about $975 million, which — depending on how the channel's cash flow is calculated — represents either an 11 times multiple of estimated 2009 cash flow or a nearly 20 times multiple. That latter valuation harkens back to the heyday of content M&A, when Viacom paid 23 times cash flow for BET Networks in 2000.
Earlier in the Travel Channel auction process, Pali Research media analyst Richard Greenfield estimated the network would generate about $50 million in cash flow in 2009, which would put a 19.5 times multiple on the deal. Scripps, in a conference call with analysts last Friday, estimated that Travel would generate about $80 million in cash flow in 2009, implying a 12 times multiple.
But that $80 million figure is achieved only after the cost of management agreements with Discovery Communications, which currently runs Travel for Cox, is backed out. Scripps chief financial officer Joe NeCastro would not disclose the actual cost of the Discovery agreement, but said that the margin to Discovery is about $20 million per year. He said the Discovery relationship expires in May 2010.
In a research report, Collins Stewart media analyst Tom Eagan estimated that Travel Channel would need to boost cash flow to $100 million to make the deal valuation neutral. In an interview he said that his estimates still stand and, though it won't be an easy road to $100 million in cash flow, he believes the network can reach that mark by 2011. The deal is expected to close in January.
Apparently so does SNI. On the conference call with analysts, SNI chief financial officer Joe NeCastro said he expects the deal to be “nicely accretive” in 2011.
Getting there will be a mixture of cost synergies and opportunities to expand affiliate fees and the channels' international reach. According to SNL Kagan, Travel Channel currently gets about 6 cents per subscriber per month from distributors. In contrast, SNI's HGTV network attracts monthly subscriber fees of about 13 cents, according to SNL Kagan.
SNI chairman and CEO Ken Lowe said on a conference call that the deal gives SNI a strong addition to its portfolio of networks that includes HGTV, Food Network, DIY and the soon-to-be launched Cooking Channel (now known as Fine Living). In addition to growing Travel's affiliate and advertising revenue, he also sees opportunities in licensing, e-commerce and brand extensions for its content and on-air personalities.
“There is a great deal of enthusiasm at all levels of our organization for this milestone transaction,” Lowe said. “Adding Travel Channel to our mix of lifestyle-oriented businesses is a logical next step in the evolution of Scripps Networks Interactive.”
According to the deal, Scripps will pay $181 million in cash and guarantee a third-party loan for $878 million that will be distributed to Cox. Cox will retain a 35% interest in the joint venture.
Cox has the right to put back its 35% interest to SNI after the fifth anniversary of the deal. SNI can call Cox's interest a year later.
Cox is not looking for a quick exit. “Our intention is to stay in this partnership,” Cox chief financial officer Mark Bowser said in an interview last week. “We recognize that this partnership helps enhance the value.”
The deal ends a long process — Cox hired Goldman Sachs to explore alternatives for the networks in June — and included some of the biggest names in cable. Early in the process, bidders included media giants like Time Warner Inc., Scripps, Viacom, News Corp., and a consortium including private equity giant Providence Equity. That list was pared down to News and Scripps in later bidding stages, with News Corp. reportedly dropping out when the price became too rich.
Whether Scripps paid too much, too little or just enough for the network remains to be seen. And Eagan said that this deal may not necessarily signal a return to the valuation heyday of the earlier part of the decade, but could serve as a benchmark for the way future deals are structured — limiting the buyer's capital exposure with the flexibility to buy in the balance over time.
“In this day of shareholders wanting to ensure that there is capital for shareholder returns, it helps to serve both,” Eagan said of the structure of the Travel deal. “You can consolidate and limit the upfront capital exposure.”
Cox and Scripps Networks will continue the search for a new chief at the network. Pat Younge (pictured l.), who has helmed the channel since 2005, officially said in May that he was leaving the position in January 2010 to return to his former home in London. A former BBC Sport chief, Younge, much admired by Cox officials, brought personality driven shows to the channel, featuring such hosts as Andrew Zimmern, Samantha Brown, Anthony Bourdain and Adam Richman of Man v. Food.