The Demerger case study of 'Home Shopping Network'.

Sep 22, 2023 12:46 am

Good morning my dear readers,

I swear, I blinked my eyes and Friday is here again. Time is flying.


The 'Home Shopping Network' Demerger Story.

Description - Home Shopping Network, lets call it HSN, was a channel in the US which used to sell products at deep discounts, 24/7.


Its 1992, HSN decided to demerge its 'Broadcasting Division' to improve its "Quality of Earnings".

The demerged Broadcasting division was named - Silver King Communications.


Reason for Demerger according to the management:

The Stock market does not understand how to value HSN because it is both a Retail company & a Broadcasting company.

Management thought that Broadcast companies are typically valued on Cash Flows while Retail companies are valued on EPS & P/e.

As a 'Combined' business, the market is using just a single metric of EPS & P/e to value HSN.

(The Broadcast business had a very high depreciation because it has acquired 12 TV Broadcast stations over the recent years).

And management thought due to the very high depreciation in the Broadcast business, it has high EBITDA but low EPS.

(And this was TRUE).


With the acquisitions of these 12 TV stations, HSN had a viewership of 27.5 million households, which made it one of the single largest audience reaches in the whole of America.

The only issue was that they had paid a lot of money for these stations and that resulted in heavy depreciation.

(Basically, low EPS but high EBITDA and the market was valuing both their businesses only on EPS).


So, the Broadcast business, Silver King Communications had $4 million of Operating Earnings but over $22 million in Cash Flow!

But if someone looked just at the EPS, they wouldnt understand how much CASH was being generated by the Broadcasting division!


Also, interesting enough, HSN decided to transfer BULK of their Debt onto the balance sheet of Silver King Communications.

Which meant that all the 'Interest Burden' was also transferred onto the books of Silver King.

(Sneaky, Sneaky)..

Basically, post the demerger of Silver King, the EPS of HSN was actually going to GO UP because all the Interest Burden was transferred away.

Hence, most Wall Street analysts, wanted to grab HSN and Dump Silver King, for obvious reasons.


But again, Silver King was actually earning HUGE AMOUNT of EBITDA and it would have no problem in servicing the debt.

(Everyone so focused on EPS in the combined entity missed this point).

The whole situation had Opportunity written all over it.

Market was going to HATE Silver King post demerger and LOVE HSN.


In the midst of this Silver King demerger, HSN also announced a second demerger, a terrible, LOSS MAKING business of 'Call processing systems'

(More on this later).


Finally, the Silver King demerger took place in 1993.

Everyone and their Grandmother too, hated Silver King because of low EPS and all the debt being transferred on this company's head.

So, Silver King listed at $5 and traded in that range for the next few months as the post demerger selling of of the proverbial GrandMothers started.

*Grandmothers in this case are the big funds and legacy shareholders who love selling post demergers.


Anyway, over the next 12 months, once the selling from legacy shareholders stopped, the price went to $10 and then hit $20.

(The Grandmothers were not happy).

Eventually Silver King was taken over by a Media Mogul.

(27.5 Million Household reach was a great asset).


Coming to HSN, yes, everyone rushed to buy HSN post demerger because the interest burden was largely gone to Silver King.

The HSN stock went up by 12% on the day of demerger.

Basically, the stock market was willing to PAY YOU to take away Silver King away from HSN.


Conclusion: No matter what the academics or economists say that the market is highly efficient.

Its eff*** NOT.


Oh and yes, remember the 'Terrible, Loss Making Demerger' of the Call Processing Systems business?

It traded at $1 post demerger for several months.

Within 12 months though, it was at $5.

Within 36 months, it was $10.

**Joel Greenblatt admitted that even he missed buying this Call Processing Systems business.


The above story HSN was one of the legendary investments of Joel Greenblatt. A True Story.


By the way, everyone talks about Netflix & Prime. But I have started enjoying Apple TV, it really is under-rated and has exceptional shows.

Exciting weekend of Football too.

That is all from me today folks, you enjoy your weekend.

My Best,

Neil Bahal


Negen Capital

Disclaimer: This newsletter is only for educational purposes. Stock market investing can result in losses. Kindly always consult with your financial advisor before acting on the contents of this newsletter in any way.

Negen Capital is a SEBI registered PMS.