Home Shopping Network Comes Roaring Back
Not long ago, it looked as if Home Shopping Network Inc.’s picture tube had gone kaput.
The television retailer was losing money for the first time. A big lawsuit against GTE Corp. boomeranged into a $100-million libel award for the telecommunications giant. Analysts and investors were ready to play taps for the company that had popularized zirconium cube jewelry peddled live on TV.
The tune has changed. HSN is rebounding. Its stock has more than doubled since hitting a low of $3 in mid-1989. Sales are setting records. The GTE issue was settled in November for $4.5 million in insurance.
What had been diagnosed as a fatal cash hemorrhage turned out to be just a near-death experience that led to some serious rethinking by once-cocky HSN executives.
“The one thing you can say about Home Shopping Network is that it takes a licking and keeps on ticking,” said Peter Grandich, a securities analyst at Affiliated Financial Management Inc. in Howell, N.J. “After the GTE award, everyone thought the party was over.”
The relatively painless resolution with GTE was a fortuitous boost for the 4-year-old company, now leaner after shedding several unprofitable ventures to concentrate on TV sales operations.
But HSN no longer is the undisputed titan of the TV marketplace following the merger of two rivals. It also is engrossed in another courtroom brawl, this time with the junk-bond investment firm of Drexel Burnham Lambert Inc.
That battle, which could determine the value of $100-million worth of HSN securities issued in 1986, illustrates the company’s crash-landing after years of heady expansion.
In dispute are bonds that pay interest of 5.5% and are convertible to HSN stock. They were an immediate hit, reflecting investor confidence in the Clearwater, Fla.-based company that had dazzled TV viewers with buying opportunities on items ranging from phony diamond rings to vitamin pills.
The price of HSN shares climbed to $47, making the convertible bonds even more attractive.
But rising costs and unprofitable diversification began to erode gains, and the stock weakened. It took a beating after HSN became mired in the $1.5-billion suit against Stamford, Conn.-based GTE, claiming an inadequate telephone system cost HSN $500 million in business in 1986 and 1987.
When the date arrived to reset the bond’s conversion rate in 1987, HSN shares were worth a fraction of their earlier value. Drexel, the bond’s underwriters, negotiated a conversion rate of $7.05 a share, down from the original $28.50.
Before the change could take effect, however, HSN sued in federal court in Tampa, claiming that Drexel artificially manipulated HSN stock down to get the lower conversion price on the bonds.
HSN claimed Drexel’s motive was to reap huge profits by selling the bonds later if HSN’s stock price rose.
For the quarter ending Nov. 30, HSN reported sales up 27% to a quarterly record of $255.2 million, compared with the same period last year. Quarterly earnings nearly doubled to more than $20 million.
“To paraphrase Twain, ‘Reports of our death were greatly exaggerated,’ ” HSN general counsel Nando DiFilippo said.
HSN also plans to discontinue its financial-service operations and scale down a pharmaceutical unit to include only its line of vitamins. HSN presently reaches about half the nation’s homes via cable or regular channels.
“We’re going to stick with the business we do best: video retailing,” said Les Wandler, HSN’s chief financial officer. “When you have a gold mine, you mine gold. You don’t go looking for other business. We learned that.”
The merger of two competitors, CVN Cos. of Minneapolis and QVC Network of West Chester, Pa., could pose a strategic threat to HSN, which tried unsuccessfully in 1987 to merge with CVN. But HSN aides aren’t worried.
“The more people get used to buying off television, the better off everyone in the industry is,” Wandler said.
Larry Gerbrandt, a media analyst at Paul Kagen Associates in Carmel, Calif., said the HSN stock could dip if bondholders exercise their stock-conversion option once the Drexel suit is resolved.
But he said assets such as its St. Petersburg-based studios and cable network give HSN intrinsic value.
“I see HSN well north of $12 a share,” he said.
“The GTE suit was a misadventure that totally distracted Home Shopping Network from its core business,” Gerbrandt said. “They’ve gotten a second chance.”
