Scripps’ Fuzzy Online Math
Posted by Mort Greenberg on March 6, 2008
Scripps’ Fuzzy Online Math
Scripps (SSP) is one of my favorite media companies.
The E. W. Scripps Company, through its subsidiaries, operates as a media company that provides content and advertising services via the Internet. It operates through four segments: Scripps Networks, Newspapers, Broadcast Television, and Interactive Media. The Scripps Networks segment operates national television networks, including HGTV, Food Network, DIY Network, Fine Living, and Great American Country. The segment also provides video-on-demand and broadband services. The Newspapers segment operates daily and community newspapers in the United States. It also owns and operates Scripps Media Center, as well as operates Internet sites, offering users information, comprehensive news, advertising, e-commerce, and other services. The Broadcast Television segment operates ABC-affiliated stations. The Interactive Media segment offers online comparison shopping services. It operates a comparison shopping service that helps consumers find products offered for sale on the Web by online retailers, as well as operates an online comparison service that helps consumers compare prices and purchase various essential home services. The company also offers BizRate, which is a consumer feedback network that collects consumer reviews of stores and products. The E. W. Scripps Company also offers other services, including syndication and licensing of news features and comics. The company was founded in 1878 and is based in Cincinnati, Ohio.
Like most media companies, Scripps is facing a threat of cannibalization.
Consumers and advertisers are flocking to the Web, but the core business of Scripps – along with all traditional media firms – remains offline. It’s a harrowing experience. One that keeps executives awake at night and creates anxiety and envy. Occasionally, they’ll make $500M decisions that puts them in a corner.
Interestingly, Scripps is in the process of spinning off its slower growing and mature businesses from its higher growth web business. But when you dive into their 10-K, you see a lot of interesting tidbits that shed light on how confused some traditional media companies can become in these digital days.
Tale of the tape
Scripps is worth $6.8B in market capitalization.
For 2007, the company’s total revenues were $2.5B with net income of almost $400M. This translates to a P/E of 18 and a P/S of 2.75.
It makes sense, in some ways, to spin off the new media assets, granted… but you have to wonder about the broader repercussions and realities for old media.
From the 10-K, via Paid Content:
Our Internet sites had advertising revenues of $40 million in 2007 compared with $34.0 million in 2006 and $22.0 million in 2005.
It should be noted that these are advertising sales only. Indeed, Scripps Interactive also consists of Shopzilla and uSwitch. In fact, in 2005, Scripps paid a whopping $525M for Shopzilla, then named Bizrate. At the time of purchase, in 2005, when Scripps bought Shopzilla:
Founded in 1996, Shopzilla, formerly BizRate, is a privately held company that is expected to generate $30 million to $33 million in EBITDA profit, also excluding investment results and unusual items, on revenue of $130 million to $140 million for the full year 2005.
As such, with a price tag of $525M (in cash, no less), at a $135M in revenues, this converted to a 3.9x P/S ratio.
As of Q3, 2007:
Shopzilla and uSwitch, which together make up Scripps’ Interactive Media division, generate upwards of $54M per quarter, driven largely by CPC and CPA-style referral fee revenues.
For what CPC, CPA and CPM mean, along with other standard online ad terminology, click here.
If you project the $200M or so that the referral business generates, at the same 3.9x P/S ratio, the unit should command a whopping $800M in a sale. Scripps is adamant that Shopzilla is not for sale, but that’s not what the rumor mill suggests.
I should disclose now that Shopzilla was an advertiser of our sites in 2007. We do not have any inside information on this matter, however.
Advertising has inherited the world
But advertising is everything these days. Free, ad-supported content is what drives value these days… and much of what Scripps is doing is all about unleashing shareholder value. So let’s focus on that.
Doing the math and focusing only on “Our Internet sites had advertising revenues of $40 million in 2007 compared with $34.0 million in 2006 and $22.0 million in 2005,” then that’s growth of 100% in 2 years but effective annual growth of 54% from 2005 to 2006 but only 17% from 2006 to 2007 .
What about 2008, you ask? The 10-K continues:
Interactive media segment profit is expected to be $13 million in the first quarter”
Multiplying that by 4, you get $52M. From 2007 to 2008, this would be growth of 30%… not bad. What happened in 2007 to kickstart growth from a paltry 17% to 30%?
Acquisitions, that’s what.
“In July 2007, we reached agreements to acquire the Web sites Recipezaar.com and Pickle.com for total cash consideration of approximately $30 million.
Scripps can file this under “Advice You Didn’t Ask For”, particularly since I’m biased, but I am not sure Scripps is wise to be buying UGC sites, frankly. Don’t take it from me: CNET (CNET) regretted acquiring Webshots; from my vantage point, Scripps will regret buying UGC sites, too. What these sites need is not more low-quality inventory… they need to pull a AOL/Webshots and find a way to create low cost, high quality video content.
strong>What does this mean for the spin-off?
Regardless of what I, a mere mortal, thinks of such acquisitions, the fact remains: the company spent $30M from Scripps’ cash hoard to load up on interactive. That was wise.
Scripps’ balance sheet shows $58.95M of cash but nearly $600M in debt. At even 5% interest charge (presume Scripps $2B in sales guarantee it a low interest rate or cost of debt), that is an annual $30M interest expense. In other words, in 2007, it paid $30M in annual carrying fees to spend $30M in acquisitions to kickstart its interactive growth. That makes sense, I guess: invest today for tomorrow’s growth.
That’s also why, I presume, they want to spin off the new media company: more capital for more acquisitions, and to pay off debt (I am guessing about the latter, I have no idea what management’s actual use of funds and strategy is).
Benchmarks
The Web’s online ad markets are growing at 25% per annum, but with quality content you expect Scripps to outgrow the market.
Moreover, while the growth rates are nothing to sneeze at… in absolute markets, they’re puny when the offline unit does $2.45B in annual sales.
You cannot, after all, simply shift your offline content online and expect the same revenues. TV ads in the US were a $75B market in 2007 while web video was a $750M market. Web video and online media in general cannibalizes traditional media and TV in particular cannibalize offline revenues… Scripps is a textbook example of a victim of this phenomenon.
What about the stock?
Of course, it’s all about the share price and market cap… so maybe the financial engineering makes sense. Does it?
Double the P/S and P/E for the online segments (since they are higher growth segments, this basically means that investors would bid twice as much for the growth), a $40M revenue in 2007 x 5.5 P/S ratio project a $220M company. Of course, that is just the online advertising contribution, the referral fees generate over $216M per year (if we simply take that Q3 2007 amount of $54M and multiply it by four).
But multiples on referral fees are in the gutters relative to multiples on ad revenue…
With the obsession over advertising these days, you have to presume that P/S for referral-based businesses is down. But since the Web does indeed command a premium to offline media, we’ll eliminate any discount or premium and simply say that today Scripps would be able to get the same multiple, 3.9x.
But the problem with this rationale is that with $200+M in revenues, that would project nearly $800M in value. I don’t think anyone would pay nearly $1B for Shopzilla.
In fact, given the herd mentality of investors and buyers in general, I doubt they’ll get $525M for Shopzilla because buyers would prefer to spend such an amount on sexier things: video, social networking, video games, etc. As such, if you work backwards and agree that a price is what the market will pay for something, it’s hard to imagine Shopzilla getting $500M on the market, so this means a P/S of about 2.5x.
So what would all of Scripps Interactive be worth?
Regardless, if you combine the businesses comprising interactive:
+ online advertising = $40M in 2007 revenues at 5.5x P/S = $220M
+ referral fees = $216M in 2007 revenues at 3x P/S = $648M
you see that the interactive business should be an almost $1B company.
If Scripps is indeed worth $6.8B… then the rationale is that you can carve out a faster growing segment, sell a portion to investors, raise money, pay down some of the debt, and then make acquisitions at a lower cost of capital.
Of course, this entails that they buy the right assets and the right people. Will they? Time will tell. But considering Scripps bought – then sought to sell – Shopzilla for $525M… you have to understand why the company is going to tread carefully.
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