Cable Access

Apr 01, 2005 10:30 PM  By

Will “The Garnet Hill Hour” be sandwiched between “Rug Gallery” and “Gold Wardrobing” on cable-TV shopping network HSN’s prime-time schedule? Perhaps, once IAC/Interactive Corp.’s acquisition of multititle mailer Cornerstone Brands is finalized.

IAC, which is perhaps best known as the parent company of St. Petersburg, FL-based HSN, on March 1 paid $760 million for Cornerstone Brands. The deal is expected to close by the end of June. The privately held Cornerstone Brands, whose titles include home decor catalogs Ballard Designs, Frontgate, and Smith + Noble; apparel books The Territory Ahead and TravelSmith; and apparel and decor catalog Garnet Hill, had earnings before interest, taxes, depreciation, and amortization (EBIDTA) of $66 million for the year ended Jan. 29.

The purchase — and its price of 11.5 times earnings — may be the strongest sign yet that the mergers and acquisitions market is roaring back to life. The price tag is “fabulous, but warranted,” says Craig Battle, managing director of Princeton, NJ-based investment bank Tucker Alexander. “IAC is getting a family of some of the best brands with some of the best metrics in the industry, such as demand per book, and ones that possess strong management teams.”

At first glance, the $6.2 billion IAC seems an unlikely parent for Cornerstone. IAC’s brands, which include Match.com, Expedia, and Ticketmaster, sell everything from financial services to concert tickets. Its HSN U.S. division accounted for $1.9 billion of IAC’s revenue last year.

Though its flagship medium is cable TV, HSN also sells via the Internet and three print catalogs, Improvements, Alsto’s, and Home Focus. The HSN print catalogs will become part of Cornerstone Brands, which in turn will fall under the HSN U.S. umbrella.

The product categories of the two companies overlap to some degree, but Cornerstone’s price points tend to be higher than those of HSN, and its 2.6 million active buyers tend to be more affluent. For instance, according to their datacards, the Improvements customer has an average income of $75,000, while the Frontgate customer has an average income of $100,000. Along the same lines, the average Improvements order size is $52 compared with Frontgate’s $200.

Overall HSN has an average order of $51, which Marty Nealon, president of HSN U.S., says is $10 more than it was just two years ago. And during the past few years, HSN has courted more upscale consumers by introducing exclusive apparel lines from designers such as Diane von Furstenberg and Randolph Scott. It also sells name-brand housewares and furnishings such as Hamilton Beach, Wolfgang Puck, Royal Doulton, and Christopher Radko.

Nealon sees no reason that Frontgate, Garnet Hill, and Smith + Nobel can’t join the HSN product lineup. She expects that some of Cornerstone’s catalogs will soon be exposed to HSN’s daily audience of more than 80 million homes nationwide. Garnet Hill and Frontgate may have their own hour-long segments on HSN as early as this summer.

If you think a home-shopping network is too downscale for high-end brands such as Garnet Hill and Frontgate, think again. Catalogs, e-commerce, and television shopping “feed off each other in powerful ways,” says Pam Danziger, president/founder of Stevens, PA-based consultancy Unity Marketing. In fact, this “nonstore” shopping segment is one of the fastest-growing markets among luxury consumers, she says. “People who underestimate the power of television shopping do so at their own peril.”

Sure synergies

While some observers may be skeptical about how smoothly HSN will be able to integrate the Cornerstone brands into its TV channel, there’s little doubt that HSN will reap significant back-end synergies. “There’s no question we’ll be sharing best practices,” Nealon says.

Nealon expects that Cornerstone’s operational talent will help HSN continue to improve its own operations. HSN has already made great strides: Its return rate is 16%, down from 19% in 2001; 97% of its packages are shipped to the customer within 48 hours, up from 86% in 2001; its phone sales abandonment rate is 4%, down from 10% in 2001 and close to the mean industry rate of 3.3% according to 2005 Catalog Age Benchmark Report on Operations (see page 27).

HSN isn’t the only multichannel merchant to attempt to purchase back-end expertise. “We’re getting calls from traditional retailers who are having trouble shipping one and two items on the Internet,” says Lee Helman, senior vice president at New York-based investment bank Gruppo, Levey & Co. “They are inquiring about catalogers because of their back-end expertise.” (GLC Securities Corp., an affiliate of Gruppo, Levey, acted as financial adviser for Cornerstone Brands, along with JPMorgan Securities.)

Merchants who survived the dot-com boom and bust can be forgiven for experiencing déjà vu. During the late 1990s through mid-2001, numerous traditional retailers paid inflated prices to acquire direct marketers for their operational and online expertise.

Take Cincinnati-based Federated Department Stores’ 2000 acquisition of general merchandise cataloger Fingerhut Cos. Federated paid a staggering 22 times earnings, primarily to acquire Fingerhut’s Internet capability. The partnership didn’t work, largely because Federated’s middle- and upper-income customer base was incompatible with Fingerhut’s lower-income audience.

But while back-end efficiencies may be a critical driver of acquisitions today, they are no longer the only driver. This go-around, prospective buyers are doing more tire-kicking. Paying 11.5 times earnings for a well-regarded, well-run company isn’t outrageous, says Larry West, president of New York-based investment bank West Cos.

Right now, it’s not a shortage of prospective buyers that’s limiting the number of industry deals. A lot of strategic buyers want to enter the catalog business, says Jim Adams, managing director of Wellesley, MA-based investment bank Tully & Holland: “The problem is finding people to sell.” But now with the healthy Cornerstone multiple, “hopefully sellers will come forward.”

Another huge deal

Speaking of big deals, on Feb. 27 Federated Department Stores announced that it had agreed to acquire May Department Stores for about $11 billion plus the assumption of about $6 billion in debt. The combined company will have more than 950 stores in 49 states with $30 billion in sales. Federated’s stores include Macy’s and Bloomingdale’s, while May owns Lord & Taylor, Famous-Barr, Marshall Field’s, and eight other department store chains. As of mid-March the deal was awaiting approval by shareholders and government regulators.

Terry Lundgren, Federated’s chairman/president/CEO, said in a statement: “It will take us until mid-2007 to implement all of the changes we would anticipate as a result of this acquisition, and we intend to take the time necessary to do it right.” Lundgren also said that the first priority “is to continue to execute in all of our stores this year, while we focus behind the scenes on consolidating corporate and support operations.”

Consolidation of stores will indeed be the first priority, according to Mike Petsky, CEO of New York-based investment bank Petsky Prunier. “Federated’s merger with May is mainly about rationalizing the retail component, although there is a multichannel component.” The company needs to determine which retail locations they want to keep and which they should close. “The cross-marketing opportunities will come later,” Petsky says. “The direct-to-customer element is a tertiary business for Federated.”
MDF