By Joe Flint and Sarah Rabil
Discovery Communications Inc. has agreed to buy Scripps Networks
Interactive Inc. for $11.9 billion, a bet that a larger footprint
in lifestyle programming will help it weather cable-TV
upheaval.
A bigger portfolio of channels that specialize in so-called
comfort-food television would give the combined company an edge in
talks with advertisers, who covet female and younger viewers
gravitating to shows such as "Property Brothers" and "House
Hunters" on HGTV and "Shark Week" on Discovery Channel.
A critical mass of programs about home renovations, cooking
contests and the like put Discovery and Scripps in a position to
offer a web-TV bundle directly to consumers, who are "cutting the
cord" to cable at a fast pace and turning to slimmed-down offerings
from Hulu and other competitors.
It will also give the combined firm more heft with programming
distributors that are under pressure to curb monthly cable fees
passed through to media companies.
News of the deal overshadowed the companies' quarterly earnings
reports, both of which fell short of Wall Street expectations. That
prompted Marci Ryvicker, an analyst at Wells Fargo, to put out a
note titled: "Well, Good Thing They're Combining Because Q2 Results
Were Underwhelming."
Discovery shares closed 8.2% lower at $24.60 on Monday, while
Scripps rose 0.6% to $87.41.
Under the terms of the agreement, announced Monday morning,
Scripps shareholders will receive $90 a share, $63 of which will be
in cash and $27 a share in Class C Common shares of Discovery
stock. The price is a 34% premium to the level where Scripps shares
were trading before The Wall Street Journal reported that the
companies were in talks.
Including Scripps's debt, the deal is valued at a total of $14.6
billion.
The seeds of Monday's deal were planted last November. Discovery
Chief Executive David Zaslav and Scripps CEO Ken Lowe participated
in a panel discussion about family values in the media at the
Vatican, where they met with Pope Francis. The two have been close
friends for three decades and often spend time together in East
Hampton, N.Y.
Over dinner in Rome, the pair discussed the challenges facing
their companies and initiatives in getting content straight to the
consumer.
Mr. Zaslav's interest in Scripps increased when he saw how
strongly Scripps programminghad performed in Latin America.
Executives at Discovery's Home & Health channel earlier this
year suggested that Mr. Zaslav reach out to Mr. Lowe to acquire
more content, but Mr. Zaslav already was thinking of a deeper
relationship, a person with knowledge of the matter said.
When Scripps executives in May started to put out feelers to
potential suitors, including Viacom Inc., Discovery approached them
soon after, people familiar with the matter said. At the Allen
& Co. conference in Sun Valley, Idaho, early last month, Mr.
Zaslav and Mr. Lowe were inseparable.
Last week, Scripps informed Viacom that it was passing on its
offer to focus on Discovery. Mr. Zaslav and his wife spent Saturday
at Mr. Lowe's Knoxville, Tenn., home, where they had lunch as
Scripps's board contemplated the deal.
Discovery owns networks including Discovery Channel, Animal
Planet and TLC. Scripps operates HGTV, Cooking Channel and Food
Network among others.
The two companies account for 13% of overall cable viewership
but receive just 7% of the monthly cable fees consumers pay,
according to RBC Capital Markets.
The merged company will control four of the five major cable
networks with the highest percentages of female viewers -- TLC,
HGTV, Investigation Discovery and Food Network, according to
Nielsen. Advertisers want female viewers because they tend to have
a big say in household purchases.
Discovery said it would be able to expand Scripps's channels
into more overseas markets, which could help generate significant
additional revenue. The combined company is also touting its
short-form video production, which will help it gain more viewers
and ad dollars on social-media platforms.
The deal could put pressure on other media companies that must
defend their turf on the cable dial. Industry experts say AMC
Networks Inc. could be the next compelling target. It isn't part of
a big conglomerate that owns broadcast or sports networks, which
cable distributors find most difficult to drop. AMC didn't
immediately respond to a request for comment.
The deal will lift the profile of Mr. Zaslav, who had a roughly
two-decade career at NBC before joining Discovery in 2007. He has
led a transition of Discovery from being primarily known for its
serious educational fare to a mix of documentary-style programming
and over-the-top reality TV -- shows like "Here Comes Honey Boo
Boo" and "Naked and Afraid." Lately, the pendulum at the company
has swung back to content with higher aspirations.
He has launched new channels, including crime-focused
Investigation Discovery, which has become a huge hit with female
viewers. And he has been as aggressive as any media CEO in
international expansion: Operations outside the U.S. accounted for
47% of the company's $6.5 billion in total revenue last year.
Discovery said second-quarter revenue rose 2% to $1.75 billion,
shy of analysts' estimates. Scripps lowered its revenue guidance
and reported second-quarter U.S. advertising sales growth of 2.2%,
which also fell short of expectations.
The deal is expected to close by early 2018, pending approval by
shareholders and regulators.
Mr. Zaslav is a close associate of John Malone, the cable mogul
who owns a nearly one-third voting stake in Discovery and sits on
its board.
Mr. Malone, who has significant interests in companies from
Liberty Media Corp. to Charter Communications Inc., has been a
driving force in the industry's mergers and acquisitions and has
talked up the need for small players in the content world to merge,
particularly as cable and broadband providers have gone through
their own wave of big deals.
Charter acquired Time Warner Cable in 2016. AT&T Inc. agreed
last year to buy Time Warner Inc.
Mr. Zaslav didn't rule out other deals. "We're not out of
bullets. We still have room to do some selective purchases," he
said.
Discovery is securing a purchase of Scripps after more than one
failed attempt over the last decade. Three years ago, talks between
the two companies broke down, in part because the Scripps family
didn't appear ready to sell.
The family, which collectively controls 91.8% of Scripps voting
shares, entered into an agreement to vote in favor of the deal, as
did Mr. Malone and the Newhouse family, which is also a major
Discovery shareholder.
After closing, Scripps shareholders will own about 20% of
Discovery's shares and Discovery investors will own 80%. The
acquisition is expected to create about $350 million in cost
savings and add to adjusted earnings in the first year, Discovery
said.
Mr. Lowe, who was already planning to step down in 2019, is
expected to join Discovery's board.
Write to Joe Flint at joe.flint@wsj.com and Sarah Rabil at
Sarah.Rabil@wsj.com
(END) Dow Jones Newswires
July 31, 2017 20:36 ET (00:36 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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