Scripps shares are up 14.8% in mid-day trading, and Discovery’s up 3.5%, following reports last night about their discussions, which have heated up over the last few weeks. Discovery CEO David Zaslav and Scripps CEO Ken Lowe were seen together last week at Allen & Co’s annual Sun Valley gathering — although that’s not necessarily a tip off: They’re longtime friends.
Viacom is also believed to have talked with Scripps. Its stock is up about 2.2%.
If Scripps is on the block, then it’s easy to imagine Disney and Comcast’s NBCUniversal taking a look at its channels including HGTV, Food Network, and Cooking Channel that target women and the advertisers that want to reach them.
Still, Discovery would be a compelling ally. Liberty Media’s John Malone — whose interests include Charter Communications, Lionsgate, SiriusXM, and Live Nation — is the leading shareholder at the company behind Shark Week. Discovery, with an enterprise value of $23 billion, likely would dominate in a combination with Scripps, whose market value approaches $10 billion with the leap today in its stock price.
But many are skeptical about the logic of a deal uniting Scripps with Discovery’s properties that include Discovery Channel, Investigation Discovery, TLC, Animal Planet, and the OWN partnership with Oprah Winfrey.
The devil’s in the details, which are still unknown and possibly yet to be determined.
In theory, a union would strengthen their hand in dealing with distributors including Comcast, AT&T , and Charter that want to reduce programming costs. It should be harder to ignore a company that has Scripps’ channels plus Discovery’s.
But Barclays analyst Kannan Venkateshwar says “it is tough to see how a combination of 16 major networks will have more negotiating leverage with distributors when both legacy and new distributors are focused on making the bundle smaller.”
Most of the skinny bundles available now “exclude Discovery and Scripps, reinforcing the perception that these are less critical relative to other networks,” he adds.
That’s one reason Scripps might be better off alone, Bernstein Research’s Todd Juenger says. With three core networks, and three flanker ones — and an unusually loyal audience — “they are the best bang for the buck for [pay TV distributors] among all the network groups.”
Scripps also is coming off a good year, with ratings that beat most of its cable network peers.
But MoffettNathanson Research’s Michael Nathanson says the company “will be challenged” to maintain its winning streak. As a result, “it’s probably a great time to find a buyer.”
Another consideration: ad sales would account for about 60% of the revenues at a Discovery-Scripps combo. That would be “by far the largest in the industry,” Venkateshwar says.
Most TV network owners want to reduce their dependence on ads as buyers discover new opportunities to reach customers on digital platforms including YouTube and Facebook.
Companies in the same business often like to merge in order to cut duplicate costs. That could amount to $200 million, Jefferies’ John Janedis estimates. Another analyst, Credit Suisse’s Omar Sheikh, says it’s “not hard to see $400 million.”
But the savings might quickly evaporate if the companies want to keep their high profit margins at a time when the pay TV business is starting to shrink.
“Scripps’ domestic business runs at approximately 50% margin, Discovery runs at just shy of 60%,” Juenger says. “Be careful when you run a synergy model if the model produces a business that operates at 75% margin; that’s probably not sustainable.”
Those who like the idea of a combination say that Scripps and Discovery might find new ways to grow. For example, Discovery — which is strong overseas — could introduce HGTV or Food to global markets .
Scripps also is strong in short form video, and might add fuel to Discovery’s digital initiatives.
Indeed, Scripps and Discovery could plausibly combine their channels into a stand-alone direct-to-consumer streaming business. Discovery, Viacom and AMC Networks have been talking to cable and satellite distributors about a potential low-cost, all-entertainment (meaning: no sports) bundle.
These are some of the reasons why a merger “would make sense and might be coming at the right time,” says MKM Partners’ Eric Handler.
There’s also the Malone factor. He’s the shrewdest dealmaker in media — and might see something here that others don’t. A lot of Malone watchers wonder whether he has a grand scheme to roll up Discovery and Scripps with Lionsgate and Charter and perhaps his European cable power Liberty Global.
That’s “far-fetched, but not impossible,” Juenger says. He might also have “come to a similar view as us, which is that Discovery is stuck in really a bad place, and he’s just trying to find some other sucker to dilute the problem and make it not as bad.”
Another possibility: “Maybe he just wanted to stir the pot and see what happened,” Juenger says. “Most likely, something altogether different than anything we’ve suggested.”