Description

Summit America Television, Inc. (fka Shop at Home, Inc.) was first written up on VIC in July of 2001. Time to revisit—the stock is cheaper, the story is simpler and has much less risk.

SATH is probably well known by some VIC members, in fact some of those members may have serious scar tissue from this idea. SATH has long been a value trap and has probably fallen off of many people’s radar screens, and as usual, has fallen off at exactly the wrong time.

This idea is part liquidation, part sum-of-the-parts, and part recap. Given that is primarily an asset play, here is a quick list of SATH’s seven key assets:

O 30% in a shopping channel JV that is majority owned and operated by E.W. Scripps
O Five TV stations:
WSAH 43 Bridgeport, CT (New York)
KCNS 28 San Francisco
WMFP 62 Boston
WOAC 67 Cleveland
WRAY 30 Raleigh-Durham, NC
O Wireless spectrum

Here’s what’s new/different about the story:

At the end of October, SATH closed on the sale of a 70% interest in the shopping channel platform to The E.W. Scripps Company (SSP). In exchange for the 70% interest, SSP paid SATH $49.5 million in cash. In addition, SSP loaned SATH $47.5 million in a three-year note that is secured by three TV stations and bears interest at six percent (clearly a below market interest rate).

Why is this significant? First, SSP is now driving the ship as it relates to the shopping channel. SATH never could quite get the shopping channel right. SSP has a proven track record at developing successful channels (Home & Garden Television, Food Network, DIY--Do It Yourself and Fine Living). Further, SSP brings distribution leverage to the table. In addition, SSP has agreed to fund reasonable working capital needs of the channel over the near term. Basically, SATH is henceforth a passive 30% owner and retains nothing but upside. These shopping channels can really be great assets—see QVC and HSN, for example.

SATH has agreed to carry the shopping channel programming on its five TV stations for three years (such agreement can be terminated after 18 months though). SATH has a FMV put to SSP for the 30% interest in the shopping channel after two years. After five years, SSP has a FMV call option with respect to the 30% interest.

Second, the receipt of the cash and the new note allowed SATH to completely pay off its other debt. This debt included HY debt and highly secured bank debt from Foothill Group. Needless to say, this debt wasn’t cheap. Further, bankruptcy was a real risk to SATH before consummation of the SSP deal. The company had too little liquidity and had borrowed against virtually all of its assets.

Going forward, the cash flow to SATH from carrying the shopping channel programming will cover the cost to operate the TV stations and the interest expense on the SSP note. SATH should operate at roughly breakeven.

Asset Value

Here is a range of possible asset values based on appraisals and “reality checks” with industry experts:

30% interest in shopping channel $21 -- 22mm
WSAH 43 Bridgeport, CT (New York): $30 -- 37mm
KCNS 28 San Francisco $80 -- 90mm
WMFP 62 Boston $60 -- 70mm
WOAC 67 Cleveland $30 -- 45mm
WRAY 30 Raleigh-Durham, NC $18 -- 25mm

Total asset value $239 -- 289mm
Less: Debt ($50 -- 50mm)

Net asset value $189 -- 239mm
Net asset value per share $4.50 -- 5.69

The $21-22mm value for the 30% interest is based on the value implied by the price SSP was willing to pay for 70% (ignoring the fact that SSP also made SATH a below market interest rate loan which would increase the value of the platform). Further, this analysis assumes a zero value for the wireless spectrum.

Unlocking the Value

I believe the values above will be unlocked within the next two years. SATH is now in a liquidation mode. Brokers have been hired to solicit bids for the five TV stations. My best guess as to how this plays out is that SATH sells a couple of the smaller stations for cash (SATH should have sufficient NOLs to absorb any gain from the sale of two stations) and then does a tax-free merger with SSP for the remainder (i.e., SSP buys the remaining TV stations and the 30% interest).

I believe the reason that SSP didn’t just offer to buy all of SATH in the first place is that it was concerned that Wall Street would think it was committing too many resources/capital to an unproven venture (i.e., the shopping channel). It’s much easier to tell Wall Street that $50mm (rather than $300mm+) gets us into this business with an established platform. It just sounds like a lower risk proposition. If SSP shows success with the channel, buying the rest of SATH (TV stations included) is probably a forgone conclusion.

Regardless of whether SSP ends up buying the rest of SATH, as a backstop each market has multiple potential buyers for the stations. Further, the FCC is relaxing ownership rules which should expand the universe of potential buyers and increase the value of SATH’s TV stations. Even if the 30% interest in the shopping channel is worth zero, SATH still has a NAV of $4.00 – 5.16/share.

If it takes two years to get $4.50/share (the low case scenario), that’s a 91% return, or a 38% annual return. In order to get a 20% annual return, you only need to reach a value of $3.45/share which implies a 25% haircut to the low case valuation noted above.

Catalyst

-->Purchase of remainder by E.W. Scripps
-->Partial sale of stations and purchase of remainder by Scripps
-->Sale of 30% interest in shopping channel to Scripps, sale of TV stations to third parties and then liquidation of SATH