QVC, HSN go over shopping list


NEW YORK -- The two dominant U.S. home shopping networks, QVC and HSN, could end up in the same hands next year in a possible deal between John Malone and Barry Diller.

It's clear from recent executive comments that the sides are exploring such a deal, but have been haggling about price, with Diller looking to get a premium by valuing the asset on expected future performance improvements.

Bringing both networks -- each of which has faced its own challenges -- under the same roof would create a home shopping juggernaut with annual revenue of about $10 billion. It would mainly benefit Malone by consolidating much of the home shopping market rather than providing big synergies between the channels, which would continue as separate entities.

In the third-quarter earnings call for Liberty Media, which controls QVC parent Liberty Interactive and Liberty Capital, executives were asked about an HSN acquisition. Liberty CEO Greg Maffei said the companies had discussed possible deal scenarios without success so far, but negotiations would continue.

This month, Maffei emphasized the importance of a good deal price. "Maybe we will let the public price it (in the planned five-way split of IAC) and do it at a time of our choosing, not when Barry wants us to buy it at a premium," he said.

QVC CEO Mike George also played things cool during the earnings call. There would be "some benefit" for Liberty Interactive from owning QVC and HSN at the right price, he said, but he also predicted synergies would be limited.

Hard synergies like cost savings would be "modest" as the company would still need to run two full networks, George said. After all, whoever operates HSN will continue to need the same warehouse space, customer service operations and the like.

Counter-programming and sharing vendors are possible softer, but "unproven" synergy opportunities, meaning that paying a big premium would be risky, George added. As an example of such synergy, Shelton suggested that a crawl at the bottom of the TV screen could alert viewers to current product offers on the other channel to avoid losing them to other networks.

George also highlighted that QVC's profitability is about four times that of HSN.

Market leader QVC forms the core of Liberty Interactive, which also holds a more than 20% stake in Diller's IAC/InterActiveCorp, the owner of smaller competitor HSN.

One of the ironies in the deal talks is that Diller already ceded QVC to Malone and might soon do so with HSN. In January 1993, he was named chairman and CEO of QVC, which in 1995 was acquired by Comcast and Liberty predecessor Tele-Communications. Diller departed and that same year, he purchased HSN.

Malone has been unhappy with IAC's stock performance, and so has Diller, which recently led him to unveil a split of the firm into five companies, one of them being HSN. Diller in a recent conference call acknowledged that some of the five planned companies could end up being sold.

Natixis Bleichroeder analyst Jeffrey Shelton argued that the sides "are still far apart on price" on HSN. But he suggested that the planned split of IAC "could act as a catalyst for a meeting of the minds, as ownership of five separate companies would make it even harder for Liberty to tax-efficiently monetize its IAC equity stake."

A HSN-for-stock swap would allow Diller to focus on his Internet assets and give Malone another puzzle piece to fit into his growing media empire.

"The most value-creating scenario would be for Diller and Malone to agree on a transaction value for HSN domestic, allowing IAC to become a pure Internet company, allowing interactive shopping powerhouse Liberty Interactive to fix HSN," Stifel Nicolaus analyst Scott Devitt said in a report.

HSN had problems with product mix in recent years, analysts said. However, in the third quarter, its revenue rose 5% year-over-year. Critics said they want to see longer-term growth and highlight that HSN's profitability remains well below QVC's. "Their margins haven't been turned around, but I expect that will come with time and (continued) revenue growth," Shelton said.

QVC also has a leg up on its older rival in most other areas and therefore feels as if it is negotiating from a position of power.

For 2006, QVC reported revenue of $7.1 billion. IAC's retailing unit, which is dominated by HSN but also includes and Cornerstone Brands, recorded revenue of $2.9 billion. Observers estimate that about two-thirds of that came from HSN.

For the first nine months of 2007, QVC's revenue stands at $5.1 billion, up from $4.8 billion a year ago. HSN revenue for the same period reached $2.1 billion.

Diana Britton contributed to this report.