Stock answers

HSN, Seagram shares rocket in deal's wake

NEW YORK — Investors snapped up stock Tuesday in HSN Inc. and Universal Studios’ parent Seagram Co. Ltd., driving up HSN’s price to its highest point in at least five years, as Wall Street continued to applaud Seagram’s plan to sell most of its TV division to HSN.

HSN stock, which has doubled in the past six months from a low of $20, closed Tuesday up $2.25, to $44.18, while Seagram stock climbed $1.43, to $36.68. PaineWebber analyst Christopher Dixon on Tuesday upgraded his rating on Seagram in response to the deal, following Cowen & Co. analyst Harold Vogel’s upgrade of the stock Monday.

But it is HSN stock that is particularly benefiting from Wall Streeters’ enthusiasm for the deal. HSN, now a mish-mash of assets led by Home Shopping Network and the Silver King television station group, as well as an interest in Ticketmaster, will double in size.

HSN is paying $4.075 billion in stock and cash to buy USA Networks and Universal’s TV production and domestic distribution business. Seagram only completed its purchase of Viacom’s 50% stake in USA on Tuesday, it said, paying $1.7 billion in cash.

The earnings from USA and the production businesses will more than double HSN’s cash flow (earnings before interest, taxes, depreciation and amortization) to more than $400 million a year.

The Universal assets being sold produce cash flow of $240 million a year, Universal execs said. UBS Securities analyst Ed Hatch estimates HSN’s cash flow this year before the deal would be $185 million.

He predicted that the new HSN, to be renamed USA Networks Inc., could earn as much as $635 million in cash flow by 1999.

At the same time, the stock being issued to Universal to pay for these businesses more than doubles the amount of stock outstanding, sources said. HSN has agreed to issue 70 million shares to Universal, using the $40 price of the stock before the deal was announced, compared with 64.8 million shares now outstanding.

It’s not often investors bid up a stock when the capital base is being doubled, but in this case, the extra profits more than make up for the extra stock. And the potential of the new company is bringing in investors. Hatch said in a report on the deal that HSN would become the third-biggest cable programmer after Time Warner Inc. and Viacom Inc., given its ownership of Home Shopping Network, USA and Sci-Fi Channel.

But “the real key is what are you going to do with it,” Montgomery Securities analyst John Tinker said.

Rumors have swept Hollywood the past two days that the deal prepares HSN chairman Barry Diller for an acquisition of CBS Inc., shortly to emerge as a new media company from the restructuring of Westinghouse Electric Group. Westinghouse stock hit a year-high Tuesday as a result of the rumors, closing up $1.37 to $29.18, although people close to HSN dismissed the speculation as ridiculous.

Sources said the company has plenty to do to digest the latest deal, although no one denies that a run at CBS is possible in the next few years. Indeed, Diller suggested to Seagram CEO Edgar Bronfman Jr. last year that Bronfman use USA as a vehicle for a bid on CBS.

Seagram, for its part, is expected to use the $1.2 billion in cash it gets from HSN to buy back stock. Seagram recently expanded its stock buyback program and Cowen’s Vogel noted in a report that further buybacks will “likely provide a floor on the stock.”

PaineWebber’s Dixon said the deal had alleviated concerns he had about Seagram’s use of capital. Not only would the cash coming in from HSN strengthen the balance sheet, but the sale of the TV production businesses means Universal won’t have to cover the cash needs of the deficit-financed shows.

“And they have aligned themselves with Barry Diller, an extraordinary executive,” Dixon added.

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