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June 14, 2007

Scripps Onlne Competitor Gets Bought Out

Over the weekend, the Wall Street Journal reported that Providence Equity was taking a control position in shopping comparison website Nextag.com. Nextag is the #2 shopping comparison website, trailing, Shopping.com. The #3 shopping comparison site is Shopzilla.com, owned by E.W. Scripps (SSP).

SSP shares have rallied on takeover speculation due to similarities with Dow Jones (DJ). On a purely private market valuation, ignoring the fact that several of SSP's business segments are struggling (including Shopzilla), I can calculate a takeover price north of $60 driven by the value in HGTV and Food Network....

The sale of Nextag probably will heighten takeover speculation surrounding SSP. According to the Journal, Providence Equity's purchase values the entire company at $1.2 billion. The Journal article did not contain any revenue or EBITDA figures for Nextag but did note that it has been profitable for 13 consecutive quarters. Based on a review of site statistics at Alexa.com, Nextag looks like it could be two to three times as large as Shopzilla. Shopzilla composes most of SSP's Interactive segment which is forecast to produce revenues of about $95 million and EBITDA of $32 million. SSP has taken down estimates for Shopzilla twice this year as the cost of buying keywords to drive traffic to the site has turned uneconomical.

Despite the poor operating performance and uncertain outlook for Shopzilla, I think SSP investors will take comfort in the Nextag sale. Assuming that Shopzilla beings to grow again in 2008, I think that a private market value of at least $600 million is plausible. This figure is higher than the fundamental valuation likely implied today where a 14 multiple would create just $450 million in value for SSP's Interactive segment. The difference is only about $1 per share but in such a frenzied deal environment, the speculation that Shopzilla has value can only further heighten takeover speculation in SSP shares.

Nevertheless, I think the shares are at least 10% overvalued based solely on fundamentals. I understand why SSP shares have rallied 10% but I don’t think it will last unless takeover rumors emerge. I'd use current strength to sell SSP looking to reacquire or get long closer to $40.

Posted by Steve Birenberg at June 14, 2007 10:30 AM in SSP