How Discovery Would Benefit From Its $14.6B Scripps Deal

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Discovery CEO David Zaslav (left) and Scripps CEO Ken Lowe

The merger will likely provide much-needed leverage with cable and satellite distributors to drive those fees higher.

After several years of courtship, Discovery Communications has officially taken Scripps Networks Interactive into its fold. But it will require more than their shared demographic appeal — their channels all attract mature audiences with buying power — to impress Wall Street.

Discovery, which is paying $14.6 billion (70 percent cash, 30 percent equity) for Scripps, suffered an 8 percent drop in its stock price when the deal was announced Monday. RBC Capital Markets analyst Steven Cahall called the acquisition “industrially sound but reflective of tough times,” noting that Scripps has preannounced lower-than-expected revenue and Discovery lost 4 percent of its U.S. subscribers in the second quarter.

Before Discovery sealed the deal, Viacom also was a Scripps suitor, seeking to diversify from its young Nickelodeon and MTV audiences. Discovery is taking a different approach, doubling down on its established nonscripted and lifestyle reputation, anchored by its namesake network as well as by TLC and Animal Planet.

They will be complemented by the three primary Scripps networks — HGTV, Food Network and Travel Channel — which boast similarly high engagement from a largely educated, female audience. However, the Scripps networks command relatively low affiliate fees, from 14 cents to 23 cents a month per channel.

The deal will provide much-needed leverage with cable and satellite distributors to drive those fees higher even as audiences stagnate or fall due to cord-cutting amid competition from such digital outlets as Amazon, Netflix and YouTube.

“With network mergers, you can take advantage of back-office synergies and leverage with distributors,” says PricewaterhouseCoopers analyst Bart Spiegel.

A combined Scripps-Discovery also could offer a popular programming skinny bundle. Scripps is the only company other than CBS that is part of Hulu’s live-streaming service but is not an owner in the joint venture. 

Other mutual gains include Scripps benefiting from Discovery’s broad international reach – which should accelerate Scripps' international expansion – and Discovery building out its digital efforts with Scripps Lifestyle Studios, which produces shortform video. That unit said in late July that it is “breaking video view records month after month,” exceeding 5.6 billion views in the second quarter, an increase of 435 percent from the same period in 2016.

Tubular Labs, an analytics firm, says that Food Network, Travel Channel and HGTV consistently rank in the top five among content creators in their respective categories in the digital realm, with Food Network ranking No. 1 over BuzzFeed’s Tasty in every month during the second quarter.

Discovery, led by president and CEO David Zaslav, is targeting $350 million in cost savings, although some analysts have forecasted less, with one estimating savings of just $175 million. Wells Fargo’s Marci Ryvicker estimates that Scripps’ $1.27 billion operating costs (out of a total $2.1 billion in annual costs) are mostly programming-related and will carry over after the acquisition.

The deal continues a powerful trend of consolidation that has seen hookups between Starz and Lionsgate, AT&T and Time Warner and Sinclair and Tribune, the latter pairs of which are still pending regulatory review.

Overall, the union, says FBR Capital Markets analyst Barton Crockett, “vaults Discovery to a 20 percent share of cable network audiences and leadership in women, which should help ad sales, affiliate talks, international prospects and over-the-top opportunities.” 

A version of this story first appeared in the Aug. 2 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.

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