Scripps Seen Appealing as Discovery Mulls Bid: Real M&A
The owner of HGTV, the Travel Channel and most of the Food Network soared to a record yesterday amid reports that Discovery’s board had discussed a potential bid for the $12 billion company. With a return on assets that’s almost three times the industry median and better-than-average free cash flow, Knoxville, Tennessee-based Scripps Networks also may appeal to other content providers including CBS Corp. and Walt Disney Co. (DIS), said shareholder Carne Capital LLC.
“I would not limit it to Discovery,” Barry Lucas, senior vice president of research at Gabelli & Co. in Rye, New York, said in a phone interview. “The assets at Scripps are just terrific. They have wonderful businesses, they’re highly cash generative and well-run, so they would be attractive” to buyers.
Scripps Networks, which may lure interest from Time Warner Inc. and Comcast Corp. (CMCSA) as well, could fetch $100 a share in a sale, a 23 percent premium, he said. S&P Capital IQ says a tie-up with Discovery makes the most sense and would help expand Scripps Networks’ channels internationally. A deal would give Discovery lifestyle content to complement channels such as Animal Planet and TLC, and bolster its leverage in negotiating with cable providers, according to Barclays Plc.
Variety had reported after the market closed Dec. 10 that Discovery board members discussed the idea of a bid for Scripps Networks at a meeting, citing an unidentified person.
The brief conversation in which Discovery’s board discussed a potential bid was part of a routine quarterly survey of potential acquisitions for the $30 billion company, a person with knowledge of the situation told Bloomberg News. Scripps Networks closed yesterday at a record $81.
Today, Scripps Networks fell 0.8 percent to $80.33.
One driver for a tie-up could be the “looming specter of cable consolidation” and the potential for stronger resistance to rising programming costs, Danish Agboatwala, a New York-based credit analyst at Barclays, wrote in a note yesterday. Buying Scripps would bolster Discovery’s programming and negotiating position on fees, the analyst wrote.
Scripps Networks is controlled by the heirs to founder Edward W. Scripps through a special class of stock. Under a family agreement, they must give first refusal rights to other Scripps family members and the company before selling in the open market.
That means the only way for the heirs to get a premium is to sell the whole company, setting the stage for a potential deal, Amy Yong, a New York-based analyst at Macquarie Group Ltd., wrote in a Dec. 10 report.
Today, Yong reduced her rating on the stock to “neutral,” the equivalent of hold, in part because expectations of a possible takeover are now baked into the shares.
Now would be an attractive time for the family to sell, with the stock up more than 90 percent in the past two years alone, said Sean Bonner, chief investment officer at Ardmore, Pennsylvania-based Carne Capital.
The prospect of getting a premium on top of those gains is “a strong motivation,” said Bonner, who manages the Carne Hedged Equity Fund, which owns Scripps shares. “You’ve got to get a big enough number on the table to get them interested.”
Bonner estimated that Scripps Networks could fetch more than a 20 percent premium, even after yesterday’s gains. That would value Scripps Networks at more than about $97 a share. Acquirers can justify the price in part because Scripps Networks is more effective at generating profits off its assets than most peers, he said.
The company, whose shows include “House Hunters,” has a return on assets of 17.2 percent, a higher rate than all but one U.S. media peer valued at more than $1 billion, according to data compiled by Bloomberg. Scripps Networks’ free cash flow yield of 6.6 percent compares with an industry average of 3.7 percent.
CBS and Disney could also be lured to Scripps Networks’ lifestyle programming, Bonner said.
“When you’re talking about HGTV and the Food Network, that’s kind of good family, wholesome entertainment that would support the Disney brand,” he said.
A large cable network owner, such as the $60 billion Time Warner (TWX), could be interested in Scripps, though nonfiction content “hasn’t been their metier,” Lucas of Gabelli said. Comcast, the $127 billion company that’s been expanding in content with its NBCUniversal unit, is another possible suitor, he said. Comcast acquired the 49 percent of NBCUniversal that it didn’t own from General Electric Co. this year.
Scripps Networks could be valued at $100 a share in a sale, Lucas said.
Representatives for CBS and Time Warner, both based in New York, declined to comment, as did a representative for Philadelphia-based Comcast.
A representative for Burbank, California-based Disney didn’t immediately have a comment.
When asked about Disney’s acquisition plans at a conference earlier this week, Chief Financial Officer Jay Rasulo said, “We don’t have anything of the scale of Lucas and Marvel, quite frankly, that we’re looking at right now.”
Disney bought “Star Wars” maker Lucasfilm Ltd. last year for about $4 billion and Marvel Entertainment Inc. about four years ago for a similar price.
Given Discovery’s focus on international markets and Scripps Networks’ focus on the U.S., a deal between the two is unlikely, Jason Bazinet, a New York-based analyst at Citigroup Inc., wrote in a report yesterday. Bazinet recommends that investors sell Scripps Networks shares because he said the stock reaction yesterday was unwarranted.
On the other hand, S&P Capital’s Tuna Amobi sees Discovery as an ideal buyer because it could use its international presence to expand Scripps Networks into other countries.
“You could see how Discovery could leverage Scripps’s underexploited international platform,” Amobi said. Scripps “has very, very valuable assets, and the way the game seems to be played these days it’s all about scale. If such a deal could materialize, there are a lot of arguments for the potential upside.”
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