Wall Street continued to warm to Liberty Interactive Corp.’s $2.1 billion stock deal to merge HSNi into its QVC business creating a $14 billion giant with a big head start in video shopping — but the deal did raise some questions about the future of the Cornerstone business.
HSNi bought the catalogue-based Cornerstone for about $715 million in 2005. But Victor Anthony, an analyst at Aegis Capital who floated the idea about a possible HSN-QVC two hours before the companies laid out their deal Thursday, said Cornerstone does not fit easily into the combined company’s overall picture.
Aegis noted: “Very little was said of Cornerstone in the presentations and we believe this was intentional because QVC is likely to part ways with the asset post the close of the transaction. However, on the call [detailing the deal] both QVC and HSN management spoke favorably of Cornerstone highlighting the top-line growth momentum, margins that are moving in the right direction and the fact that management has weeded out underperforming brands.”
Aegis said there were “no natural synergies with Cornerstone and the TV shopping segment that we have seen and that the two businesses operate independently.”
Cornerstone has five digital sales sites, 16 stores and outlets and distributes about 300 million catalogues each year. In 2016, it saw sales fall 5 percent to $1.1 billion, although that decline was tempered to a 1 percent drop on an adjusted basis.
Aegis suggested the company could sell Cornerstone, which he valued at $340 million, and use the tax asset from a loss on the sale to offset future taxes.
Despite the question about Cornerstone, the analyst said he was bullish about the deal.
“The video commerce model has proven to be durable and has outperformed traditional retail in both good and bad cycles,” he said. “The model produces superior financial returns relative to traditional retail, given the relatively low capital intensity, low advertising expense, high cash conversions and high margins. Brand exclusivity at time of airing, mobile penetration and a demo with high disposable income, high repeat usage and high retention rates will serve the combined company well as they increasingly compete against pure-play online behemoths.”
By midday Friday, shares of HSNi had risen 1.4 percent to $40.25. That came on top of HSNi’s 26.8 percent increase Thursday and put the stock at just below the $40.36 valuation in the deal, which is expected to close in the fourth quarter. Shares of QVC rose 1.2 percent to $24.44 after falling 1.2 percent on Thursday.
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