Tuesday’s announcement that HSN parent company IAC/Interactive Corp. was purchasing multititle mailer Cornerstone Brands for $760 million is likely to herald additional strategic acquisitions within the industry, experts say. The deal is expected to close in the second quarter.
The privately held Cornerstone, whose apparel, decor, and home accessories titles include Ballard Designs, Frontgate, Garnet Hill, Smith & Noble, The Territory Ahead, and TravelSmith, had earnings before interest, taxes, depreciation and amortization (EBIDTA) of $66 million for the year ended Jan. 29.
The 11.5 multiple that IAC paid for Cornerstone is “a fabulous price but warranted,” says Craig Battle, managing director of Princeton, NJ-based investment firm Tucker Alexander. “They are 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.”
HSN Catalog Services, which consists of the Improvements and Alsto’s home products catalogs, will become part of Cornerstone Brands. Although several Cornerstone titles, such as Frontgate and Ballard Designs, sell home improvement and decor products, their price points are somewhat higher than those of the HSN titles. For instance, according to their datacards, the Improvements customer has an average income of $75,000; 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.
Nonetheless, IAC expects the acquisition to yield “significant cross-promotional benefits,” according to a release. The $6.2 billion IAC, whose other properties include Expedia and Ticketmaster, clearly sees an enormous opportunity to leverage Cornerstone’s 2.6 million active customers as a platform for additional growth, particularly on the Web. Currently 37% of Cornerstone’s business comes from e-commerce.
IAC is expected to feature some of the Cornerstone brands on its own selling channels. “For someone like a Frontgate to be in people’s homes selling on HSN, for example, has enormous power,” says Lee Helman, senior vice president at New York-based investment bank Gruppo, Levey & Co. JPMorgan Securities and GLC Securities Corp., an affiliate of Gruppo, Levey & Co., acted as financial advisers for Cornerstone Brands. Lehman Brothers advised IAC in the deal.
Of course, the deal will provide back-end synergies as well. According to Helman, retailers are once again interested in acquiring direct marketers for their operational resources. “We’re getting calls from traditional retailers who are having trouble shipping one and two items on the Internet,” he says. “They are inquiring about catalogers because of their back-end expertise.”
Battle terms the coupling “a curious combination. But given the demographics of the two companies it has the potential to be a blockbuster. But no question,” he adds, “it is a bold stroke in the catalog industry.”