Scripps Networks Buys Travel Channel, But Could Be Next To Go

Scripps Networks Interactive (SNI) could become an even bigger takeover target now that it is acquiring a controlling 65 percent stake in The Travel Channel.

Scripps will enter into a joint venture with privately-held Cox Communications, which will remain a 35 percent co-owner. Cox will contribute The Travel Channel (valued at $975 million) and Scripps will bring $181 million in cash to the new partnership. The new venture also assumes $878 million in third-party debt which will be used to pay Cox. The creative deal structure allows Cox to avoid taxes on its acquisition of The Travel Channel from Discovery Communications (DISCK) in a 2007 asset swap.
Scripps' successful management of cable networks (such as The Food Network and HGTV) has made it a prime acquisition target since it was spun off from E.W. Scripps (SSP) more than a year ago. Such branded content is in demand as digital distribution becomes a commodity.

The Travel Channel deal raises the bar on the value of cable networks, which benefit from dual subscription and advertising revenues. Analysts initially estimated the channel was worth between $600 million and $700 million. Bidding by Scripps, News Corp. (NWS) and others drove up the overall value to about $1 billion.

That price tag reflects the potential revenue growth Scripps expects by including the cable network in its winning operations formula and expansion plans. The Travel Channel generates a modest $50 million in cash flow on a static base of about 100 million homes, according to Pali Capital analyst Richard Greenfield. International and pay TV tier expansion of The Travel Channel could be lucrative given its affluent viewer demographics. That could justify the rich sales price, which appears to be more than 17 times The Travel Channel's estimated 2009 EBITDA (earnings before interest, taxes, depreciation and amortization), Greenfield said.

Low program production and talent costs make it possible for Scripps to convert about 60 percent of its earnings into free cash flow, according to Goldman Sachs analyst Mark Winkes. Scripps is expected to use its cash to buyout bankrupt Tribune Co.'s (TRB) 31 percent stake in The Food Network. Scripps also will invest in global operations, which generate less than five percent of its overall revenues.

Scripps is valued at more than $6 billion and has no debt. It is among the content companies identified by analysts as potential merger and acquisition candidates in 2010. Others include Discovery, DreamWorks (DWA) and Lions Gate (LGF).

Time Warner (TWX), News Corp and Viacom (VIA) this week reported quarterly earnings that were turbo charged by their popular cable networks. Comcast is negotiating with General Electric (GE) to acquire a majority stake in NBC Universal largely because of its robust content and cable networks (such as CNBC, MSNBC and USA). That deal could be announced as early as next week.

Any of those media giants could pursue Scripps. In a regularly scheduled earnings call with analysts Friday, Scripps management is expected to reiterate that the company is not for sale. That's the same thing GE said about NBCU less than a year ago.