Discovery Closes Scripps Acquisition, Creating Nonscripted Content Giant
Management, led by CEO David Zaslav, has said the targeted $350 million in cost savings could be exceeded.
Discovery Communications on Tuesday said it has closed its acquisition of Scripps Networks Interactive, creating a powerhouse in the unscripted and lifestyle content field at a time when deals have been a recurring theme and topic of debate in the entertainment industry.
The company's shortened name will be Discovery Inc. to demonstrate "a new focus on growth in the areas at which Discovery excels, telling stories across deeply loved genres and empowering superfans to explore their world wherever and whenever they choose."
"Today marks another critical milestone for Discovery, as we become a differentiated kind of media company with the most trusted portfolio of family-friendly brands around the globe,” said David Zaslav, president and CEO of Discovery. “As a new global leader in real-life entertainment, Discovery will serve loyal and passionate audiences around the world with content that inspires, informs and entertains across every screen; deliver new ways for advertisers and distributors to reach highly targeted audiences at scale; and leverage our leadership position to create new value and growth opportunities for all of our stakeholders.”
John Malone, who is a big shareholder in Discovery, has pushed for content industry consolidation, which big companies have used to get even bigger in an effort to gain leverage over competitors and allow for cost cuts. Among various consolidation moves, Lionsgate has acquired Starz; AT&T agreed to acquire Time Warner; and Walt Disney in December unveiled a $52.4 billion deal to buy 21st Century Fox's film and TV studio, along with such cable networks as FX and National Geographic, as well as international assets, among others.
More recently, Comcast unveiled a $31 billion planned offer to buy European pay TV giant Sky, of which Fox currently owns 39 percent.
Discovery had unveiled the cash-and-stock deal for Scripps at the end of July, when it was worth $14.6 billion including debt, saying it would form "a global leader in real-life entertainment" and "accelerate growth across linear, digital and shortform platforms around the world."
Discovery sealed the Scripps deal after several previous failed conversations about buying Scripps, beating out Viacom. Zaslav has said the acquisition would make Discovery-Scripps the largest global owner of intellectual property, ahead of Walt Disney before the latter closes its takeover of large parts of 21st Century Fox.
Scripps has operated HGTV, Travel Channel and Food Network, among others, while Discovery's networks include the likes of Discovery Channel, Animal Planet, TLC and OWN. Scripps shareholders will now own 20 percent of Discovery.
Discovery management originally targeted $350 million in cost savings, but has more recently said it may exceed that. It has also said there are revenue benefits that it hasn't quantified so far.
Discovery CFO Gunnar Wiedenfels reiterated that during an appearance Tuesday at the Deutsche Bank Media, Telecom & Business Services Conference in Palm Beach, Florida, in a webcast session and said an updated estimate for synergies would be shared in the near future. "We were very enthusiastic about it in the very beginning. ... The more we look at the potential that this combination creates, the more bullish we become," he said. “We have spent every single day since we announced the transaction getting ready for this. ... We look at this as a transformation rather than an integration exercise."
The CFO cited opportunities to optimize costs, including the more than $3 billion in combined content spending; the ability to better serve audiences, including superfans, advertisers and brands; and the chance to offer over-the-top and direct-to-consumer services.
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 combined company 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.
As such, the combined company will have more leverage in carriage talks with pay TV distributors, such as cable and satellite TV companies. That is increasingly important as the number of U.S. pay TV subscribers has fallen amid cord-cutting and competition from such digital outlets as Amazon, Netflix and YouTube.
Wall Street analysts have also highlighted that Scripps does not have the global reach of Discovery, meaning there is upside in making Scripps channels, such as HGTV and Food Network, more global brands. Discovery is also expected to further its digital efforts with Scripps Lifestyle Studios, which produces shortform video.
Discovery has said the deal would be accretive to its adjusted earnings per share and free cash flow in the first year after close.
Analysts have been mixed on the mega-combination, with critics arguing it will see Discovery double down on lifestyle content instead of expanding into new growth area.
But some have become more optimistic on the stock as of late. MoffettNathanson analyst Michael Nathanson upgraded his Discovery stock rating from "sell" to "neutral" on Feb. 20, "primarily based on the fear that our 'sell' call is now reflected in consensus views and in current valuations." In addition, he argued that Wall Street estimates "are not fully reflecting the profit and loss savings for the changes in U.S corporate tax rates at ... Scripps Networks, the benefits of the weakening dollar at Discovery and higher-than-expected near-term cost savings from the upcoming Discovery-Scripps merger."
Barrington Research analyst Jim Goss earlier in the year also upgraded his rating on Discovery's stock from "market perform" to "outperform," citing his "increasing confidence that the depressed stock price in recent years does not reflect the value that can be created in the Discovery/Scripps combination." He argued: "The Scripps asset acquisition offers the potential to create additional throughput in its international market with quality programming that has not been the subject of significant international distribution."
Macquarie Capital analyst Tim Nollen also started off the year with a Discovery upgrade to "outperform," citing "he under-appreciated upside from the Scripps merger, burgeoning direct-to-consumer opportunities in Europe and new growth in short-form online video."
As recently unveiled, current Discovery channels group topper Rich Ross will be exiting the company, while Kathleen Finch, currently chief programming, content and brand officer for all six Scripps brands, will become chief lifestyle brands officer for the combined company with management oversight of HGTV, Food Network, TLC, ID, Travel Channel, DIY Network, Cooking Channel, Discovery Life, American Heroes Channel, Destination America, Great American Country and Lifestyle Digital Studios in the U.S.
Kenneth Lowe, the former chairman, president and CEO of Scripps, will join Discovery’s board of directors, effective immediately.
Zaslav in January said that while other companies have been unveiling or eyeing more deals, "we don’t think right now we need to get bigger, because we are not playing in that scripted TV, scripted movie game. ... Everybody is going there. It's the red carpet, it's the sexy actors and actresses, it's the opening and it's all the glare and all the glamour. That's not us.”
He continued: "Everybody is moving toward that, and the investors are saying, ‘Boy, does that look sexy.’ But that’s a very difficult game. It's a difficult game because it's so crowded, it's $5 million an hour or more for scripted television. ... But on that side is Amazon and Netflix that are getting valued a very different way."
Concluded Zaslav: "All of that is in disruption. That is on the right side. Our view is 'good luck with that.' We are on the left side of the ledger, we're in the business of nonfiction. Our average cost of content is $400,000 to $450,000 an hour. We own all of our content globally. And we are in the enthusiast superfan business."