Coverage: Discovery buys Scripps, owner of Food Network

Discovery Communications Inc. is acquiring Scripps Networks Interactive Inc. for $11.9 billion in a deal expected to boost the company’s negotiating leverage as it seeks new audiences.

Jessica Toonkel of Reuters had the news:

The acquisition, announced on Monday, brings together Scripps’ largely female-focused lifestyle channels such as HGTV, Travel Channel and Food Network with Discovery’s Animal Planet and Discovery Channel, whose viewers are primarily male.

Despite expectations of $350 million in total cost synergies, many analysts questioned how the combined company would compete long term as viewers cut cords to cable providers and as advertising and ratings decline.

Discovery shares ended regular trading down 8.2 percent at $24.60 while those of Scripps finished up 0.6 percent at $87.41.

Discovery is paying 70 percent cash and 30 percent stock for Scripps. The total price of the deal is $14.6 billion including debt.

“While we believe the two companies are likely better positioned together, rather than apart, the longer-term issues facing the industry still remain,” wrote John Janedis, an analyst at Jefferies, in a note on Monday.

Emily Steel of the New York Times noted the combined company will control 20 percent of TV advertising:

The combined company would control about 20 percent of the advertising-supported pay-television audience in the United States, and it could create a force in television popular with female viewers, bringing together the Scripps channels and Discovery offerings including Investigation Discovery, OWN and TLC.

The talks took place amid broad consolidation in the telecommunications and media industries in the United States. Over the past several years, cable and broadband providers including Comcast, Charter, Verizon and AT&T have steadily increased their market presence. That has put pressure on TV companies like Discovery to grow in size as a way to gain leverage in negotiations with cable distributors.

The deal announced on Monday had been in the works for a long time. The companies held talks to combine several times — most recently in 2014 — although those discussions fell apart over a range of issues, including price. In pursuing Scripps, Discovery also faced competition from its rival Viacom.

“We believe that by coming together with Scripps, we will create a stronger, more flexible and more dynamic media company,” David M. Zaslav, chief executive of Discovery Communications, said in a statement.

Rani Molla of Recode noted that the combined company is now worth more than Viacom:

The combined entity will create a sizable bundle of channels worth over $22 billion — Discovery’s market value plus the size of the Scripps deal. That’s more than Viacom, the next-biggest TV company by market value.

Caveat: Discovery’s offer includes both cash and stock, and as Discovery’s shares have dropped on the announcement, the overall value is now slightly lower. Also, once Scripps is fully absorbed into Discovery, investors will buy and sell that stock accordingly and its valuation will likely change. But this offers a fair look until then.

In theory, the combination does two things for Discovery’s business: It gives it more leverage when negotiating carriage agreements with cable distributors, and it cuts costs. The merger is estimated to save $350 million in costs.

But what it won’t do is solve the main issue confronting TV companies: The internet. Discovery, Animal Planet, HGTV and Food Network excel in creating the kind of reality content the internet already produces for free, so this tie-up won’t solve that issue.

The combined 2017 monthly affiliate revenue fees could grow to about $3.10 per subscriber, when Discovery and Scripps affiliate revenues are added, according to data from financial data firm S&P Global.