‘Shark Week’ meets HGTV
Discovery’s deal to acquire Scripps could help the programming firms survive the industry.
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.”