‘Shark Week’ meets HGTV

Dis­cov­ery’s deal to ac­quire Scripps could help the pro­gram­ming firms sur­vive the in­dus­try.

Los Angeles Times - - FRONT PAGE - By Meg James

Dis­cov­ery Com­mu­ni­ca­tions carved a lu­cra­tive niche in tele­vi­sion with “Dead­li­est Catch,” “Naked and Afraid,” “Shark Week” and other shows that por­tray sur­vival in the wilds. On Mon­day, the ca­ble pro­gram­ming com­pany made a preda­tory strike to en­sure its own sur­vival.

Dis­cov­ery an­nounced its $11.9-bil­lion cas­hand-stock ac­qui­si­tion of Scripps Net­works In­ter­ac­tive, the Knoxville, Tenn., ca­ble pro­gram­ming com­pany that boasts life­style chan­nels pop­u­lar with women, in­clud­ing HGTV, Food Network, Travel Chan­nel and Cook­ing Chan­nel.

The union of the two well-known pro­gram­ming com­pa­nies — one that pri­mar­ily caters to men, the other to women — will com­mand nearly 20% of ca­ble view­er­ship in the U.S. and have sig­nif­i­cant growth prospects over­seas through Dis­cov­ery’s network of in­ter­na­tional chan­nels.

“This po­si­tions us very well as our in­dus­try con­tin­ues to evolve,” Dis­cov­ery Chief Ex­ec­u­tive David Zaslav said dur­ing a con­fer­ence call with an­a­lysts.

The Dis­cov­ery-Scripps com­bi­na­tion would cre­ate a more for­mi­da­ble en­ter­tain­ment com­pany, val­ued at more than $25 bil­lion. The new lineup would im­prove Dis­cov­ery’s lever­age with pay-TV dis­trib­u­tors and en­able the com­pany to of­fer a stream­ing ser­vice di­rectly to con­sumers, made up of chan­nels owned by Dis­cov­ery and Scripps.

The pro­posed tie-up comes af­ter two failed at­tempts over the last decade for the two com­pa­nies to com­bine. This time, how­ever, Dis­cov­ery and Scripps were mo­ti­vated to merge be­cause it has be­come in­creas­ingly treach­er­ous for medium-sized me­dia firms to stand on their own amid rapid con­sol­i­da­tion in the in­dus­try.

“This is just the per­fect mar­riage as far as two com­pa­nies and two in­cred­i­ble man­age­ment teams and em­ployee groups com­ing to­gether,” said Ken

Lowe, chair­man and CEO of Scripps Net­works, a 37-year com­pany vet­eran who decades ago came up with the con­cept of a “home and gar­den” chan­nel, which be­came HGTV.

For years, ca­ble pro­gram­mers con­sis­tently have raised the fees that they charge dis­trib­u­tors, such as Char­ter and AT&T’s DirecTV, for the rights to carry their chan­nels. But con­sol­i­da­tion among TV oper­a­tors and the wor­ry­ing trend of pay-TV cord-cut­ting have given the dis­trib­u­tors more lever­age in fee ne­go­ti­a­tions with ca­ble chan­nels. That im­bal­ance has put the squeeze on smaller pro­gram­mers, such as Dis­cov­ery and Scripps, which also are grap­pling with rat­ings de­clines.

Com­bin­ing gives the com­pa­nies more clout with pay-TV dis­trib­u­tors at a time when con­sumers are watch­ing less tra­di­tional TV and can­cel­ing or scal­ing back on ca­ble TV pack­ages with hun­dreds of chan­nels.

Sil­ver Spring, Md.-based Dis­cov­ery has strug­gled to win car­riage for its port­fo­lio of chan­nels, in­clud­ing An­i­mal Planet, TLC, In­ves­ti­ga­tion Dis­cov­ery and an in­ter­est in the Oprah Win­frey Network, in some over-thetop stream­ing ser­vices, such as Sling TV.

“We think this helps us with our abil­ity to get onto all bun­dles,” Zaslav said.

What’s more, launch­ing a stand­alone stream­ing ser­vice would help Dis­cov­eryScripps bet­ter con­trol its des­tiny and re­main rel­e­vant with younger con­sumers who watch fewer hours of lin­ear tele­vi­sion than their par­ents.

But some an­a­lysts said the union would do lit­tle to solve the core prob­lem fac­ing the com­pa­nies. Pay-TV sub­scriber de­fec­tions threaten a key source of rev­enue at a time when pro­gram­ming costs are ris­ing. Tele­vi­sion dis­trib­u­tors pay af­fil­i­ate fees for the rights to carry Scripps’ and Dis­cov­ery’s chan­nels, and the fees are cal­cu­lated by the num­ber of sub­scribers that re­ceive the chan­nels.

“We be­lieve there could be a base of 31 mil­lion homes that could cut or shave the cord over the next decade, with some net­works de­clin­ing at an even faster pace,” Bar­clays Cap­i­tal me­dia an­a­lyst Kan­nan Venkatesh­war wrote in a re­port July 24. “It is tough for us to imag­ine a world where all the 200+ ca­ble net­works in ex­is­tence to­day re­main vi­able.”

Another prom­i­nent me­dia an­a­lyst, Michael Nathanson, on Mon­day said the pro­posed merger re­flected the stiff chal­lenges faced by ca­ble pro­gram­mers.

“This shotgun mar­riage is a clear sign that the ca­ble network in­dus­try has seen the fu­ture, and that fu­ture re­quires deep cost-cut­ting and in­creased scale to mit­i­gate both the cur­rent head winds and the in­evitable painful changes that lie ahead,” Nathanson said.

The two com­pa­nies dis­cussed merg­ing in early 2014, but talks broke off over Scripps’ price and Dis­cov­ery’s in­ter­est in bulk­ing up its in­ter­na­tional net­works with sports rights, in­clud­ing for the Olympics. The ro­mance be­tween the two com­pa­nies rekin­dled in Novem­ber when Dis­cov­ery’s Zaslav and Scripps’ Lowe were at the Vatican in Rome to speak at a com­mu­ni­ca­tions con­fer­ence.

Then, six weeks ago, Zaslav was meet­ing with his Mi­ami-based team, and staff mem­bers sug­gested Dis­cov­ery li­cense more of Scripps’ pro­gram­ming, in­clud­ing the Food Network, be­cause its shows were per­form­ing well in Latin Amer­ica, ac­cord­ing to a knowl­edge­able in­sider. Zaslav then re­solved to do more than just li­cense Scripps’ con­tent; he set his sights on buy­ing the en­tire com­pany, this per­son said. Talks ac­cel­er­ated in the last few weeks.

Com­peti­tor Vi­a­com Inc., con­trolled by the Sum­ner Red­stone fam­ily, was also vy­ing for Scripps. But Vi­a­com, which has such chan­nels as MTV, Nick­elodeon and Com­edy Cen­tral, dropped out of the bid­ding last week.

The con­trol­ling share­hold­ers of Scripps, the fourth gen­er­a­tion of the fam­ily of the 19th cen­tury press baron E. W. Scripps, de­ter­mined the time was right to sell their com­pany.

“It’s just a his­toric day for Scripps, for the Scripps’ fam­ily, for the em­ploy­ees of Scripps Net­works In­ter­ac­tive,” said Lowe, who will have a seat on the board of the merged en­tity. “We couldn’t be more ex­cited about the fu­ture to­gether and pos­si­bil­i­ties that are out there.”

Scripps share­hold­ers will re­ceive $90 a share. Of that, $63 will be in cash and $27 a share will be in Dis­cov­ery’s Class C com­mon stock. The deal price rep­re­sents a 34% pre­mium over Scripps’ share price July 18, be­fore news of the ne­go­ti­a­tions be­tween the two com­pa­nies leaked.

Dis­cov­ery would as­sume Scripps’ $2.7 bil­lion in debt.

Scripps shares rose 50 cents, or 0.6%, to $87.41. Dis­cov­ery’s C shares fell $2.20, or 8.2%, to $24.60.

The deal, which is sub­ject to ap­proval by reg­u­la­tors and com­pany share­hold­ers, is ex­pected to close in early 2018.

When the deal is com­plete, Scripps share­hold­ers would own about 20% of Dis­cov­ery’s fully di­luted com­mon shares. Dis­cov­ery share­hold­ers would hold about 80%. Dis­cov­ery’s largest in­di­vid­ual vot­ing share­holder is ca­ble mogul John Malone.

Dis­cov­ery is bet­ting that it can ratchet up its advertising rev­enue be­cause so many of Scripps’ chan­nels, such as Food Network and HGTV, have a sta­ble of loyal ad­ver­tis­ers, such as home im­prove­ment prod­uct re­tail­ers Home De­pot and Lowe’s.

But Nathanson of the re­search firm Mof­fet­tNathanson pointed out that Scripps missed its sec­ond-quar­ter advertising tar­gets. “We don’t think this merger will fun­da­men­tally al­ter the long-term prospects of these com­pa­nies,” he said. “With­out any ma­te­rial im­prove­ment to cur­rent rat­ings and sub­scriber trends, the tim­ing and cost for Dis­cov­ery to dou­ble down in the U.S. will likely look fool­ish in hind­sight.”

David Fleetham Dis­cov­ery Chan­nel

DIS­COV­ERY Com­mu­ni­ca­tions carved a niche with pro­grams such as “Shark Week.” Its deal for Scripps Net­works In­ter­ac­tive would cre­ate a more for­mi­da­ble en­ter­tain­ment com­pany, val­ued at more than $25 bil­lion. Above, a great white shark off South Aus­tralia.

Jim Cooper Associated Press

CHEF BOBBY FLAY com­petes in the Food Network show “Iron Chef Amer­ica.”

Mark Von Holden AP Images for Dis­cov­ery Com­mu­ni­ca­tions

KEN LOWE, left, chair­man and CEO of Scripps Net­works In­ter­ac­tive, and David Zaslav, Dis­cov­ery Com­mu­ni­ca­tions’ CEO, af­ter the an­nounce­ment of the deal.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.