Discovery Closes $14.6B Acquisition Of Scripps Networks Interactive

Discovery Communications said it has formally closed its $14.6B acquisition of Scripps Networks Interactive, creating a powerhouse of unscripted programming that CEO David Zaslav says will dominate the space it calls “real-life entertainment.”

The new company will be known as Discovery Inc. Under its umbrella are cable networks such as Discovery, Food Network, HGTV, ID and TLC, plus the sports network Eurosport and a stake in digital content generator Group Nine Media.

“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 Zaslav in the official announcement.

In an interview with Deadline, Zaslav stressed the cost advantages of the combined company — not only operational efficiencies, which he has estimated at $350 million, but also the discount afforded by steering clear of scripted fare.

“Our costs are about $400,000 an hour, compared with $5 million for a scripted show — and we don’t see the cost going up,” he said.

About 30% to 40% of all TV viewing is unscripted, he estimated. Plus, given the price point, there is no risk of sharing costs and sacrificing any upside. “We own all of our content globally,” Zaslav said. The approach also suits the ongoing transition to mobile viewing. Netflix’s “The Crown is a wonderful show,” he said. “But are people going to watch The Crown on mobile?”

International distribution is also driving the deal. While Discovery’s stable of networks is available in some 220 countries, the only Scripps presence outside the U.S. is in Poland. “They were losing money internationally” at the time of the transaction, Zaslav said. He pointed to the international motive in Disney’s proposed acquisition of most of 21st Century Fox and Comcast’s overture to acquire Sky. The Discovery-Scripps deal has also come together during a time of dramatic M&A maneuvering, with AT&T battling the government over its Time Warner takeover and a range of other deals redrawing the media map.

Against that backdrop, some analysts have criticized the strategy of one cable programmer acquiring another, arguing that it increases leverage at a time when linear ratings challenges and distribution deals are creating headaches. Discovery disagrees. In its Scripps announcement, the company said the deal is expected to be accretive to adjusted earnings per share and to free cash flow in the first year after the close, and Zaslav in the interview repeatedly emphasized the boost to cash flow.

Kenneth W. Lowe, longtime chairman and CEO of Scripps, will join Discovery’s board, effective immediately.

Scripps shareholders will receive approximately $90 per share, consisting of $65.82 per share in cash and 1.0584 per share in Series C Common shares of Discovery stock. The valuation is based on a volume weighted average price (subject to elections and proration), in each case in accordance with the terms of the merger agreement. The payout includes a cash payment of $2.82 per share in connection with Discovery’s previously announced decision to exercise in full the cash top-up option under the merger agreement.

As the trading session wound down today, Scripps shares were flat at $90.13, while Discovery’s were off a fraction to $24.52. Discovery shares have moved sideways since the deal was announced.