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 bigger footprint
in lifestyle programming -- like the kind seen on TLC, HGTV and
Food Network -- will help it weather the upheaval in cable
television.
A bigger portfolio of channels that specialize in topics such as
home improvement, food, travel and science would give the combined
company an edge in talks with advertisers, who covet the female and
young viewers gravitating to shows such as "Property Brothers" and
"House Hunters" on HGTV and "Shark Week" on Animal Planet.
A critical mass of these types of unscripted shows puts
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 "skinny" online bundles from Hulu, Google
Inc.'s YouTube, Dish Network Corp.'s Sling TV 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.
Discovery shares fell 6.5% to $25.05 in morning trading, while
Scripps rose 0.8% to $87.61.
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.
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 deal will create a must-buy network group for advertisers
interested in targeting women and help the network command more
premium ad rates. Of the top 20 U.S. cable networks, the merged
company will control four of the top five with the highest
percentage of female viewers -- TLC, HGTV, Investigation Discovery
and Food Network, according to Nielsen data.
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.
"We believe that by coming together with Scripps, we will create
a stronger, more flexible and more dynamic media company," said
David Zaslav, chief executive of Discovery, in announcing the
deal.
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.
Viacom Inc. had also been in talks with Scripps, but Scripps
decided to negotiate exclusively with Discovery after reviewing the
bids from both companies, according to people familiar with the
matter.
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.
The companies announced disappointing earnings simultaneously
with the deal news. 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 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.
The sale to Discovery will end more than two decades of family
control over the Scripps cable networks. Scripps Networks got its
start in 1994, when now-CEO Ken Lowe created HGTV within E.W.
Scripps Co., a newspaper company and later local-TV-station owner
founded in 1878 by Edward Willis Scripps. Scripps Networks was
split off from E.W. Scripps in 2008.
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.
Talks between the two companies heated up again earlier this
summer. Discovery had been carrying some Scripps content on one of
its Latin American properties and the strong ratings performance
persuaded Mr. Zaslav it might be time to take another run at the
company, he said.
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
synergies and add to adjusted earnings in the first year, Discovery
said.
Mr. Lowe, who was already planning to step down as CEO 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 13:29 ET (17:29 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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