Viacom shares are under pressure amid reports that it’s serious about trying to buy Scripps Networks Interactive — including a Reuters report that says the entertainment company is willing to pay all cash for channels including HGTV, Food Network, and Travel Channel.
Viacom was down 3.3% yesterday, and is off 1.5% in early trading today.
Scripps, with a market value of more than $11 billion, is up about 5% so far this week.
If the reports are accurate, then it would appear to be an about-face for Viacom CEO Bob Bakish.
His strategic plan, introduced in February, aimed to narrow the company’s focus on six core brands: Nickelodeon, Nick Jr., BET, Comedy Central, MTV, and Paramount — with Spike rebranded as a general entertainment service: The Paramount Network.
That seemed to make sense at a time when cable companies and other distributors, eager to control programming costs, are looking to jettison channels that don’t attract large, loyal audiences.
In addition, the company vowed to lighten up its debt to keep it “investment grade” — meaning that it’s deemed a safe enough for public institutions, pension funds, and risk-averse firms. In April, Viacom sold its stake in Epix to MGM to help reduce debt.
Moody’s gives Viacom its lowest rating for investment-grade debt, and said in April that “debt and leverage reduction are key” for the company to keep from falling into the category colloquially known as “junk.”
That’s why some Wall Streeters are skeptical that Viacom will end up with Scripps. Discovery Communications is also talking to the lifestyle networks company.
“Given Viacom’s balance sheet constraints, we have a hard time seeing how the deal could happen without involving the issue of some very expensive equity,” Cowen & Co’s Doug Creutz says. “We also think management has its hands full turning around the existing Viacom business; compressing 17 networks to six, only to add six more, seems counterproductive.”
Barclays’ Kannan Venkateshwar also believes that a Viacom deal for Scripps “will move in the opposite direction” it has laid out which would raise “questions around strategy, something that is key to Viacom’s” stock price.
MoffettNathanson Research’s Michael Nathanson says if Viacom offered all cash for Scripps then it “would very likely get downgraded to junk status…something the company has been trying to avoid for the past few years as it digs out.”
What’s more, he says, if there ‘s no “material improvement to current ratings and subscriber trends, the timing and cost for either Discovery or Viacom to double down in the U.S. will likely look foolish in hindsight.”
Wells Fargo Securities’ Marci Ryvicker says that Discovery would be a more logical merger partner for Scripps, but adds that Bakish “has every reason to at least look” if he thinks that “adding these nets to its own six flagships would create more value.”
Guggenheim’s Michael Morris also sees Discovery as “a more likely and economically rational partner” for Scripps. But he says that if Viacom prevails, it might be able to save $317 million a year by eliminating duplication in the companies’ operations.