NEW YORK (The Deal) -- With Liberty Interactive's (QVCA) plan to buy online retailer Zulily (ZU) for $2.4 billion, a long-anticipated union of the John Malone-backed company with fellow TV shopping network HSN (HSNI) looks less and less like a near-term event.
QVC parent Liberty Interactive has held stock in HSN since its 2008 spinoff from IAC/InterActiveCorp (IACI) , and the stake has crept from about 30% to 38%. An imbalance in the valuations of the TV retailers prevents a closer relationship, at least for now. The Zulily acquisition could improve Liberty Interactive's growth profile and valuation, but will not immediately close the gap.
CEO Greg Maffei called HSN "a great company" in an August call announcing the Zulily purchase, but downplayed the likelihood that Liberty Interactive would boost its stake any time soon.
"We're proud to have them in the Liberty family," Maffei said. "But when we look at the profile of its growth rate, which looks more similar to our own, versus the multiple not only of EBITDA but even more of free cash that it's trading at, we don't consider that attractive versus our own stock and certainly not versus the opportunity to join with Zulily."
Robert Routh of FBN Securities values QVC at 8.6 times 2015 EBITDA, based on Tuesday's open, while HSN trades at a multiple of a little more than 10 times projected 2015 EBITDA. A takeout premium may account for part of HSN's valuation, but the company also has less exposure to international markets and less risk than QVC.
As part of QVC, Routh estimates, Zulily would generate $90.9 million in 2015 EBITDA. After taking in Zulily, the analyst suggests, the combined companies would be worth 9.2 times EBITDA. While edging closer to HSN's metrics, QVC would still be a turn of EBITDA short.
Maffei opened the deal talks with Zulily in early April, when he called the target's chairman and co-founder, Mark Vadon, according to a prospectus filed in early September. Discussions continued, including a meeting at Allen & Co.'s Sun Valley Conference in Idaho in July.
QVC made a nonbinding proposal to pay $17.50 to $19 per share in early July. Zulily told QVC in late July that it had "likely interest" from another company. When QVC offered $18.75 in August, Zulily pushed for $19 per share. Maffei did not budge, however.
Zulily has a younger audience and an attractive growth profile. The e-commerce company grew more than 75% in 2014 to post revenues of $1.2 billion. The company expects revenues to hit $1.4 billion in 2015 and to reach $2.8 billion by 2019. QVC forecasts that its sales will expand at a comparably lethargic rate, from $8.85 billion in 2015 to $10.5 billion in 2019.
"People are going to want to see the Zulily deal close and see the cost savings," Routh said. "HSN would want to see that too."
Liberty Interactive and HSN are well acquainted. Courtnee Ulrich, who heads investor relations for Liberty Interactive, sits on the board of HSN. When QVC said in June that it would shut down a contact center in HSN's home state of Florida, Routh notes, it appeared to some like an integration plan.
"We've been expecting that deal for 10 years," Routh said, comparing the anticipated deal to the long courtship of DirecTV (DTV - Get Report) by AT&T (T - Get Report) . The telecom's predecessor company, SBC Communications, had eyed the satellite TV group, which AT&T acquired in July for about $67 billion, including debt.
QVC declined to comment on the possibility that it could boost its stake in HSN if the valuations converge.
Like many stocks, HSN has gotten more affordable in the last month. Shares have declined from the Aug. 5 close of $74.15, when the company reported earnings, to less than $60. A 35 cent dividend payment in late August accounts for some of the decline. The market cap is now a little less than $3.2 billion.
Zulily was not exactly cheap, but Routh says the deal is "worth the risk." The analyst puts the Zulily takeout at about 27 times EBITDA. At $18.75 per share, however, the stock was a substantial mark down from its close of $37.70 on its first day of trading in November 2013.
With a continued markdown at HSN, or a markup at QVC, the phones should start ringing.