Discovery to Acquire Scripps Networks for $14.6 Billion

THR 100 List 2017 - David Zaslav -Getty-H 2017
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The transaction will bring together two big cable networks groups known for nonscripted and lifestyle content, with the companies eyeing $350 million in cost savings.

Discovery Communications and Scripps Networks Interactive have made it official, unveiling a $14.6 billion deal that will combine the two cable networks companies known mostly for nonscripted and lifestyle content.

Discovery will acquire Scripps in the cash-and-stock deal, which the companies said would bring together two sets of strong brands, including networks popular with women, allow for $350 million in cost savings, provide more international opportunities for Scripps' business given that Discovery has been a global player longer than Scripps and give the merged firm more upside in digital and direct-to-consumer services.

Scripps operates HGTV, Travel Channel and Food Network, among others, while Discovery's networks include the likes of Discovery Channel, Animal Planet, TLC and OWN. The companies said they would create "a global leader in real life entertainment" and "accelerate growth across linear, digital and short-form platforms around the world."

The $90 per-share price tag of the deal, based on Discovery’s Friday closing price, represents a premium of 34 percent to Scripps’ unaffected share price as of Tuesday, July 18, before deal talks were first reported. Discovery is paying $63 per share in cash and $27 per share in stock. Scripps shareholders will end up owning 20 percent of Discovery, which will also take on Scripps' net debt of approximately $2.7 billion in the deal.

The combination is expected to close by early 2018 and create "significant cost synergies," the companies said, estimating them at approximately $350 million. The deal is expected to be accretive to Discovery's adjusted earnings per share and free cash flow in the first year after close, they said. 

Viacom had also been pursuing Scripps, but last week bowed out of the bidding process, clearing the way for Discovery, which has long been interested in a deal. In 2013 and early 2014, it had also held talks with Scripps, but the Scripps family at the time didn't seem ready to sell. 

"This is an exciting new chapter for Discovery," said David Zaslav, president and CEO of Discovery Communications. "Scripps is one of the best-run media companies in the world with terrific assets, strong brands and popular talent and formats. Our business is about great storytelling, authentic characters and passionate super fans. We believe that by coming together with Scripps, we will create a stronger, more flexible and more dynamic media company with a global content engine that can be fully optimized and monetized across our combined networks, products and services in every country around the world."

“Through the passion and dedication of our incredible employees, and with the support of the Scripps family, we have built a lifestyle content company that touches the lives of consumers every single day,” said Kenneth Lowe, chairman, president and CEO of Scripps. “This agreement with Discovery presents an unmatched opportunity for Scripps to grow its leading lifestyle brands across the world and on new and emerging channels including short-form, direct-to-consumer and streaming platforms.”

Discovery and Scripps said the combined company "will offer a complementary and dynamic suite of brands" and produce approximately 8,000 hours of original programming annually, be home to approximately 300,000 hours of library content and will generate a combined 7 billion shortform video streams monthly, "demonstrating its commitment to delivering content as a top short-form provider."

Discovery and Scripps said that together they will also have a nearly 20 percent share of advertising-supported pay TV audiences in the U.S. The merged entity will operate five of the top pay TV networks for women and will account for over a 20 percent share of women watching primetime pay TV in the U.S., they said.

In terms of international upside, the companies said: "The combination will extend Scripps’ brands, programming and talent to a broader international audience through Discovery’s best-in-class global distribution, sales and languaging infrastructure."

Bringing together Scripps’ expertise in shortform video creation with Discovery’s investment in Group Nine Media will allow the enlarged firm to "create a new scale player with a strong ability to compete for audiences and ad dollars," the companies said. "Discovery’s added scale, content engine and multiple brand offerings will present a compelling opportunity for new digital distribution partners, including mobile, OTT and direct-to-consumer platforms and offerings."

Lowe is expected to join Discovery’s board following the close of the transaction, which is subject to approval by shareholders of both firms, regulatory approvals and other customary closing conditions.

John Malone, who is a big shareholder in Discovery and has pushed for content industry consolidation, the Advance/Newhouse Programming Partnership and members of the Scripps family, which controls Scripps, have agreed to vote in favor of the transaction. 

Wall Street has been mixed on a deal. While bulls have highlighted that a combination would give the enlarged entity more power in carriage talks with pay TV operators, bears have said a deal means doubling down on a challenged business amid cord cutting and ratings challenges.

"We view the deal as among the most logical in media," RBC Capital Markets analyst Steven Cahall said in a recent report. "Both are somewhat relatively sub-scale when dealing with distributors, and while their combination may not put them on equal footing with a broadcast network or major sports rights owner, scale matters and should improve network carriage and affiliate negotiations."

Among recent deals between pay TV distributors and challenges to traditional TV networks, he also highlighted: "Investors have viewed consolidation among smaller players as an eventual inevitability."

Discovery, "perhaps the best cost manager in media," according to Cahall, was expected to look for cost synergies, both in overhead and programming, and possible revenue synergies. 

Others have been less bullish. MoffettNathanson analyst Michael Nathanson in a recent report wrote: "While there will likely be ample cost synergies, international revenue opportunities and improved relative scale, we don’t think this merger will fundamentally alter the long-term prospects of these companies."   

And Wells Fargo analyst Marci Ryvicker wrote: "Although we still don't believe that either combination [Discovery-Scripps or Viacom-Scripps] solves the long-term affiliate fee 'issue,' our math at least suggests that Discovery would be the better buyer of Scripps — both from a pro forma leverage and an accretion standpoint."