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January 12, 2007

In Major Change, Scripps Looking To Exit Newspapers

E.W. Scripps (SSP) is trading at a 52 week high following the company's announcement that it is considering alternatives for its newspaper business. This is a big change for SSP which has denied for many years its interest in divesting its newspapers or TV stations.

Newspapers represent a little over 20% of SSP's 2007 estimated EBITDA when 60% of EBITDA will come from the company's cable networks, which are dominated by HGTV and Food Network. SSP's strategy over the past decade plus has been to take the cash flow and balance sheet strength provided by its newspapers and TV stations and invest in faster growing new media assets. The first target was cable networks. The new target is online. The cable networks were mostly built internally, while the internet business, likely to approach 10% of EBITDA in 2007, is being built via acquisition.

Investors have bid up SSP shares by about 5% since the company began openly discussing the possible restructuring of its newspaper ownership. I think that is fair but about taps out the upside. First, separating the newspaper business is complicated by the provisions of the Scripps Trust that controls the company. I guess management must feel there are ways around the Trust document or they wouldn't be talking publicly but a simply structured separation might not be easy to achieve. Second, a sum of the parts approach to valuation suggests that SSP shares are trading at parity with or a premium to other entertainment conglomerates like Disney, Viacom, and News Corporation. An argument could be made that SSP will enjoy faster growth, can sustain longer off a smaller base, or is further along in building an internet business. However, I don’t see much upside to valuation based on current estimates.

And estimates is what will really matter....

Cable networks have been performing better than expected over the past six months due to strong spot pricing for advertising. I find myself increasingly isolated in my view that the growth rate in this business, industrywide, could surprise to the downside. On the flip side, I think the company is being conservative with its estimates for the internet businesses, Shopzilla and uSwitch. Shopzilla appears to have enjoyed a very good holiday season. Both business incurred heavy business development expenses in 2007. Those expenses might be sustained at high levels but they don’t seem likely to grow much further which would allow very high incremental margins on double digit revenue growth.

I am kicking myself for not getting long SSP while it was trading in the low to mid-$40s. My concern about slowing growth in the cable network advertising ended up being misplaced (for now, at least). Assuming the cable nets enjoy a solid 2007, I can create a legitimate valuation target in the mid to upper $50s but that is not enough for me after the latest move up.

So despite the good news that about a possible separation of the newspaper business, I am staying on the sidelines.

Posted by Steve Birenberg at January 12, 2007 08:52 AM in SSP