If you aren't watching The Food Network's Giada de Laurentiis on her daily show, Everyday Italian, you should be. I find myself inexplicably hypnotized as she floats effortlessly around her sunny (but admittedly rented Los Angeles kitchen) skillfully constructing simple, tasty, Italian dishes - her show has the addictive power of a garlic-seasoned, home-style heroin casserole.
Interestingly enough, Giada just happens to be the granddaughter of famed Italian-born movie producer, Dino de Laurentiis - producer of some of my favorite all-time flicks: Dune, Army of Darkness, Serpico, Conan the Barbarian, the 1976 version of King Kong, Flash Gordon, and a host of other greats. She received her classical chef training at Le Cordon Bleu in Paris, and she isn't afraid to knock down a few inventive, summery cocktails with her pals. When it gets down to it, there is nothing here but good reasons to root for Giada and her scrappy cable network.
Upon further review, the Food Network is chalk full of great programming. From Bobby Flay's oddly likeable arrogance to food genius Alton Brown's underrated sense of humor - this network flat-out rules. The network's meteoric rise since 1993 makes perfect sense after taking in an afternoon with Giada, Bobby, Paula, and the gang.
We took a break from the employee lounge during a commercial break to check out if we could get a piece of the action by investing in our new favorite cable network. As it turns out, the network is 70% owned by The E.W. Scripps Company (Public, NYSE:SSP).
SSP is a media conglomerate, holding network TV stations, newspapers, and internet shopping search assets. Its stock has been moving sideways for years.
According to SEC filings, SSP has a 70% interest in Food Network and may be angling for the additional 30%. Speculation about Tribune's asset divestment options have increased the likelihood that the two parties will be able to come together on a price. A recent WSJ article (only available to paid subscribers, sorry) implied some of the previous flagships like Emeril Live! have stagnated, but new stars like the Paula Deen have picked up some slack. A look at the reported segment information from the latest 10Q highlights where the dough is rising at SSP:
SSP also reports direct profit attributable to each segment, but this figure does not include shared services and corporate overhead - making this more of an informational amount. All encompassing or not, you gotta love the tasty operating margin growth at the Networks (HGTV/Food Network / Fine Living / GAC):
So what about the old media operations? The list of owned and operated newspapers is notable. Here's a few titles off the list:
According to the last 10-K, annual circulation was down for nearly every SSP newspaper. Newspaper operations represent a nice chunk of SSP's total business (30% of YTD revenue), which ain't just an appetizer when we are trying to figure out where SSP is going to find earnings growth.
Interactive Media might just be that place. This consists of revenue related to the $525M acquisition of Shopzilla.com (operator of Bizrate.com) in June 2005 and its $383M purchase of uSwitch.com in March 2006. These are online comparison shopping and search engine referrers that make money by getting consumers to click through to their retail partners.
Follow this link for some education on the topic and the opinion of an industry blogger. These acquired companies have great growth and generate excellent cash flow. SSP has designs on intertwining their online shopping capabilities and infrastructure across the sites it operates for its various media outlets. Check out Food Network's website's first tab:
So how wide is the competitive moat here? Well, with respect to the interactive media plays, nobody likes quotes like these (from SSP's 10-K):
We also face competition from general search engines and portals, such as Yahoo! and Google which serve as origination Web sites for consumers to find products and merchants. Yahoo! (through Yahoo! Shopping) and Google (through Froogle) also provide services similar to ours.
A great quote comes to mind from Giada's grand pappy's cult-classic Army of Darkness: "Good bad I'm the guy with the gun." In this town square, Google has the gun.
How about the object of our affection, Food Network and her handy, tool-belted brother, HGTV? Can Food Network become the USC Football of cable by simply reloading great talent year after year? Tough act to follow, and Pete Carroll isn't on the board at SSP, yet...
SSP's prospects seem to lie squarely on the shoulders of the cash flow growth generated through the crown jewel cable networks and a pair of interactive media companies. This is the frosting on the reliable cash flow cake that is broadcast TV and newspapers. While the afternoon lineup at Food Network and HGTV throw off increasing amounts of cash, management has used it to make big bets on media plays. Keep in mind that when companies seek to diversify earnings through marginally related acquisitions, more often than not, Joe shareholder loses.
The Shopzilla acquisition seemed easier for the street to stomach because it has synergistic applications that may prove to create value. A look at the market's reaction to the uSwitch acquisition suggests that this one was outside of the box. Take a look at uSwitch.com and decide for yourself - can you make the easy connection?
It will always be cheaper for single investors to make diversification decisions. Shareholders need not rely on, or congratulate for that matter, efforts on part of management to make unrelated acquisitions in the name of diversification. We can buy shares in pure play assets to replicate this portfolio effect.
Last night, I caught myself watching and thoroughly enjoying the Travel Channel's No Reservations with Anthony Bourdain.
He talked about food, culture, and life - and I listened, intensely. Leveraging Tony's personality, the Travel Channel has shown that the Food Network has no lockdown on food-related cable. At one time, Tony dropped this great quote:
"Meals make the society, hold the fabric together in lots of ways that were charming and interesting and intoxicating to me. The perfect meal, or the best meals, occur in a context that frequently has very little to do with the food itself."
Thanks for reminding us, Tony. Giada, you damn near had us. Food isn't about cable programming and advertising revenue, it's about friends.
We like the steady cash flows and the foundation for interactive media integration into traditional media assets. However we are weary of the risk of the current growth engines and the scope of future acquisitions potentially in the works.
We are going to lean back at the table, hold our stomachs, and pass on signing on to a whole order of the seemingly delectable desert that is SSP. After all, doubts about long term earnings growth go straight to our thighs. We are just going to have a bite of our friend's before the earnings release. The market has pent up hunger for a good news story in advertising revenue. So just a taste - who knows, that interactive media filling might end up being fat free.
Note: The Author, Ben Ruddy, is long 1/2 block of cheese, 2 boxes of risotto, a container of old milk, and seventeen miscellaneous condiments at the time of this publication. He's in it for the entertainment value not to actually cook anything.
Article written by: Ben