Wednesday, July 19, 2017

Discovery Communications And Scripps Networks In Talks To Combine

Media companies previously explored tie-up, but abandoned effort in 2014.


By Dana Mattioli and Amol Sharma
The Wall Street Journal
July 19, 2017

Discovery Communications Inc. DISCB 4.11% is in talks to combine with Scripps Networks Interactive Inc., SNI -1.76% people familiar with the situation said, a deal that would unite two media companies trying to chart a course in a cable-TV industry being upended by digital consumption.

Terms of the deal talks couldn’t be learned. Discovery Communications is worth about $15 billion, including its preferred stocks, according to S&P Global Market Intelligence. Scripps has an $8.8 billion market valuation.

There is no guarantee that the two sides will reach a deal. It is also possible that another bidder for Scripps could emerge.

Scripps shares were up 13% in after-hours trading

Both media companies specialize in nonfiction cable programming. Discovery owns brands such as its namesake Discovery Channel, Animal Planet and TLC, while Scripps has a portfolio including HGTV, Cooking Channel and Food Network.

The companies have discussed tying up before. In 2014, they abandoned talks about a merger and one issue at the time was that the family that controls Scripps wasn’t ready to sell.

Discovery, based in Silver Spring, Md., posted revenue of $6.5 billion last year, while Scripps brought in $3.4 billion in revenue. The two companies, like other midsize cable TV companies that don’t own broadcast or sports networks, are trying to figure out where they fit in a shifting media landscape.

Traditional cable is under pressure from streaming services like Netflix , which are luring away subscribers. Cable channels are vying to be part of “skinny” online TV bundles from Sling TV, Hulu, YouTube and others.

The biggest cable-network owners have an advantage in those negotiations.

Together, Discovery and Scripps could be in position to offer their own subscription web-TV bundle of nonfiction programming. Both companies also are banking on their expertise in food, travel and cooking programs to translate well to young consumers on Facebook and Snapchat.

There is also a simple logic to getting bigger at a time when distributors in pay television have done their own deals and may have more leverage in channel-carriage negotiations. Cable networks get a slice of consumers’ monthly bills based on rates hashed out with the providers. In recent years, AT&T Inc. has purchased DirecTV and Charter Communications Inc. has merged with Time Warner Cable.

It is far from certain that a Discovery-Scripps merger would resolve some of the structural problems they and other media companies face in the TV world, including the gradual movement of eyeballs—and advertisers—to digital platforms that are perceived to allow more sophisticated audience targeting.

Discovery has struggled with soft advertising growth in the U.S., amid ratings pressures on its channels, though it turned in a solid performance at the advance TV ad sales season this spring. Cord-cutting has partially offset gains the company has made in revenue from cable TV subscriptions. Last year overall revenue grew 2%.

Under Chief Executive David Zaslav, Discovery has pursued international expansion as aggressively as any U.S. media company. International revenues now make up about 46% of total revenue. Scripps has less overseas exposure and could benefit from the tie-up in that respect.

Discovery bought the European sport broadcaster Eurosport in 2015, and has bought rights to the Olympics and some soccer games. Those investments and fluctuations in foreign currency have weighed on financial results, at times.

Cable mogul John Malone had a 28.2% voting stake in Discovery, as of the most recent proxy filing.

Scripps has an unusual governance structure that can be a significant factor in completing a deal. When the last of founder Edward W. Scripps’ grandchildren died in 2012, a family trust was ended and shares were distributed to a host of family beneficiaries.

Those people collectively control 91.8% of voting shares. When significant company matters arise, they hold a special meeting beforehand to determine, by majority vote, how the family will vote.

Scripps has been resilient compared with some other media companies in a tough ratings environment. U.S. ad revenues increased 10% last year. Networks like HGTV and DIY, with mostly live viewership, haven’t suffered as much from time-shifting. Scripps is also known for having a female-skewing audience on its networks, something that analysts say appeals to certain segments of marketers.

In 2016, Scripps’ total revenue grew 12.7% to $3.4 billion, while profit increased 11% to $674 million.

A Discovery-Scripps merger would be the biggest media deal since AT&T Inc.’s proposed $85.4 billion acquisition of Time Warner Inc.last October, a deal that is undergoing regulatory review.

Year to date, media M&A only accounts for $32.7 billion in deal volume globally, according to data provider Dealogic. That is the lowest volume of media deal making since 2010.


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