Leading Analysts have Mixed Feelings about Discovery’s $14.6 Billion Acquisition of Scripps Networks

Discovery CommunicationsOn Monday Discovery Communications announced that the company is to acquire Scripps Networks Interactive for $14.6 billion. The combined company will have nearly 20 percent of ad-supported pay-TV viewership in the United States, which will see Discovery’s broad portfolio of TV networks combined with Scripps’s portfolio lifestyle of channels. This deal has obvious strategic advantages when it comes to scale and in strengthening the hands of two leading content producers at a time when competition for content has never been higher, but that’s just a small part of the wider picture for the new company. VAN asked a number of leading analysts what they thought of the deal and the views were mixed.

Andrew Rosenman, founder and president of Arise Communications, a US-based TV advertising consultancy, told VAN, “This is an interesting deal from an advertising perspective since these combinations have often helped cable network groups to capture greater commitments from national advertisers due to the increased scale.”

“To some degree there may be overlap between the Scripps and Discovery viewers that is duplicative, especially among women 18-54, but this may strengthen their combined grip on that particular segment and give them more flexibility to meet these audience guarantees.”

He added, “An opportunity in the deal that is getting less attention is the potential for cross-network promotion and ability to build audiences for new properties and online platforms. Given the declining viewership traditional linear cable is getting overall, this may be critical to ensuring audiences for advertisers in the future.”

However, the acquisition won’t solely focus on advertising either, says Rosenman. “It’s also important to recognise the Scripps/Discovery combined e-commerce potential, as both network groups have recognised the importance of their direct offerings to consumers in the form of branded products, all of which points to a combined consumer data management and CRM capability that some advertisers may also also be able to leverage,” he added.

Rosenman also said the acquisition was in all likelihood a stepping stone towards an even bigger deal. “Ultimately this may be the first in a series of deals for these companies with the next stage being an acquisition of the combined group by a distribution company. Given the presence of John Malone in this deal, it’s likely that Charter or Liberty Global are the suitors to watch,” he said.

On first news of a prospective deal between Discovery and Scripps, Brian Wieser, Senior Analyst at Pivotal Research, said wrote that the deal should be positively received by investors given the potential to drive efficiencies across both businesses. “We think that networks will require investments in programming that outpace revenue growth on an ongoing basis, limiting the opportunity for margin improvement without the synergies that might follow from this kind of M&A. Network owners who attempt to reduce growth in spending on programming will probably find that they lose audience share (and advertising budget share) as well as clout with distributors or the ability to sell directly through to consumers.”

Wieser also said that the competitive landscape was likely to fuel consolidation in the US TV industry, noting that “each of Discovery, Scripps and Viacom are in particularly difficult positions, especially relative to owners of broadcast networks including Disney, Fox and CBS.”

“Discovery, Scripps and Viacom each lack sports programming or much in the way of other high-end original content on their core US networks. Each of them will generally have a harder time persuading distributors to increase the fees paid by much, or to ensure carriage of every network. Each of these networks are also probably worse positioned vs. peers to create direct-to-consumer offerings,” he added.

Will Milner, Senior Analyst at Arete Research, said that in the end Discovery has had to pay a higher price for Scripps — and with more cash — than he expected, meaning the new company will have to take on high levels of debt, a ratio of 4.8x (i.e. the company’s debt is 4.8 times greater than the company’s equity).  “There are many risks to taking on this level of debt: Discovery has substantial cyclical advertising exposure and currency risk.”

Milner also noted that both Discovery and Scripps reduced their profit guidance for the coming gear, and that Discovery suggested that the rate of subscriber declines to its larger networks has been accelerating.

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