Discovery Buys Scripps for $11.9 Billion to Form Cable GiantBy and
Combined company will own cable channels Animal Planet, HGTV
Deal could give Discovery more leverage in distribution deals
Discovery Communications Inc. agreed to buy Scripps Networks Interactive Inc. for $11.9 billion in a bet that uniting ownership of cable channels like Animal Planet and HGTV will help the company adapt to a fast-changing television landscape.
Discovery, one of billionaire John Malone’s key holdings, is grappling with shrinking audiences at some U.S. channels -- including the Discovery Channel and Animal Planet -- as consumers drop cable subscriptions and get more entertainment online from Netflix and others. Discovery Chief Executive Officer David Zaslav said Monday he plans to use Scripps programming to strengthen the company’s international reach and expand its distribution options, including creating more short-form video for social media.
The combined companies could leverage their programming to ensure they’re included in new online TV services that offers fewer channels at lower prices, he said. Given their wide viewership, both Scripps and Discovery networks are relatively inexpensive for distributors to include in their channel lineups, he said. Hulu and Alphabet Inc.’s YouTube TV, for instance, didn’t include Discovery networks in their new web-TV services, and YouTube didn’t include programming from Scripps.
“It probably helps in those discussions,” Zaslav said Monday of negotiating with new online-TV services. “We do think we are making ourselves a very compelling core of a skinny bundle.”
Discovery wants to package the Scripps networks with its own in an online service for as little as $3 to $4 a month, Bloomberg reported this month, citing a person familiar with the company’s thinking.
Discovery fell 5.6 percent to $25.30 at 10:13 a.m. New York time, while Scripps rose 0.8 percent to $87.60.
Discovery, based in Silver Spring, Maryland, will acquire Scripps for about $90 a share and assume long-term debt of $2.7 billion, bringing the total price of the equity value plus liabilities to $14.6 billion, according to a statement Monday. The price represents a 34 percent premium over Scripps’ close of $67.02 on July 18, the day before news of the companies’ talks became known.
Discovery’s offer forced Viacom Inc. to abandon its own efforts to acquire Scripps, people with direct knowledge of the matter said last week.
Discovery’s cable channels are losing 3 percent of subscribers each year, and his smaller channels are losing subscribers at a faster rate, Zaslav said Monday. Scripps, meanwhile, said Monday that ratings declines have forced it to lower its revenue and profit outlook for the year.
The deal combines two companies that specialize in so-called unscripted programming, focused on real-life adventures, travel, wildlife and home. With Scripps, Discovery gets the home-improvement channel HGTV, where hits like “Property Brothers” and “Fixer Upper” have made it one of the more popular cable networks.
The combined company will have almost 20 percent of the ad-supported pay-TV viewership in the U.S., with a large female viewership. Buying Scripps could help Discovery boost its international sales, which currently account for half of its annual revenue. Knoxville, Tennessee-based Scripps owns an interest in Polish TV operator TVN and a stake in Britain’s UKTV.
As part of the deal, Scripps Chief Executive Officer Kenneth W. Lowe will join Discovery’s board.
“This agreement with Discovery presents an unmatched opportunity for Scripps to grow its leading lifestyle brands across the world and on new and emerging channels including short-form, direct-to-consumer and streaming platforms,” Lowe said in the statement.
However, analysts remains skeptical of the logic of combining two portfolios of cable networks as U.S. TV viewership declines and new online distributors offer “skinny” bundles with fewer channels, not more. Some noted that Discovery’s content, like Animal Planet, is more applicable to an international audience than Scripps’s food and home content.
“While we believe the two companies are likely better positioned together, rather than apart, the longer-term issues facing the industry still remain,” said John Janedis, an analyst at Jefferies LLC.
The U.S. Justice Department is expected to give its assent, in part because the deal’s unlikely to concentrate the advertising market, Paul Gallant, a Washington-based analyst for Cowen & Co., said in a note Monday.
The deal should face a “light review” before U.S. antitrust authorities because the companies are “relatively small” and their merger won’t threaten competition, Roger Entner, founder of Recon Analytics LLC, said in an interview.
Though smaller, Scripps has an especially valuable asset in HGTV, which was the fourth-most watched U.S. network in prime time this year, with an average of 1.51 million viewers a night through July 16, according to Nielsen data. The descendants of Edward Willis Scripps, the newspaper mogul who founded the Penny Press in Cleveland in 1878, control 92 percent of the voting stock and had rebuffed earlier takeover attempts by Discovery.
Deal talk is picking up in the TV industry as network owners grapple with the decline in cable and satellite services amid online competition. Liberty Media’s Malone also has discussed a deal to buy all or part of Spanish-language broadcaster Univision Holdings Inc., according to people familiar with the matter.
Pay-TV distributors like Charter Communications Inc. and AT&T Inc. have grown through acquisitions in recent years, giving them added leverage in fee negotiations with channel owners like Viacom, Discovery and Scripps. That’s led some network owners to conclude they need to sell as well. Time Warner Inc., owner of TNT and HBO, agreed last year to be bought by AT&T for $85.4 billion.
Cable and satellite-TV providers pay fees to channel owners for the right to carry their channels, and the negotiations have grown more tense now that more pay-TV subscribers are cutting the cord.
Network owners are also beginning to offer their own online services to compete with YouTube and Netflix. CBS Corp. offers its flagship network and Showtime as standalone services online. Walt Disney Co., which owns ESPN, is developing an online service to reach sports fans who aren’t using traditional cable.
— With assistance by Todd Shields