Discovery Communications (NASDAQ:DISCA) Buying Scripps (NASDAQ:SNI) for $14.6 Billion, but Concerns Remain

The once prolific cable TV industry has been struggling over the past few years amid ratings declines, cord cutting and advertising weakness, while consumers have been dropping their subscriptions in favor of online alternatives for their viewing pleasures.

Discovery Communications Inc. (NASDAQ:DISCA) is looking to buck this trend with the acquisition of Scripps Network Interactive Inc. (NASDAQ:SNI) in a cash and stock deal valued at $14.6 billion, which would result in a larger footprint in lifestyle programming.

Discovery owns networks such as Discovery Channel, TLC and Animal Planet, while Scripps runs Food Network, HGTV and Cooking Channel.

According to RBC Capital Markets, Discovery and Scripps comprise 13% of overall cable viewership but get just 7% of monthly cable fees from consumers.

The combined company will control nearly 20% of ad-supported pay-TV viewership in the U.S. while offering about 300,000 hours of content and generating 7 billion short-form video streams monthly.

The combination will also extend Scripps’ brand to a wider international audience using Discovery’s distribution, sales and language infrastructure.

According to Discovery, the merger is expected to create about $350 million in cost synergies. It is expected to close in early 2018.

In The Works

The deal has been in the works for a long time. Discovery discussed a potential deal with Scripps about nine years ago, but the Scripps family’s shareholders, who control about 92% of the stock, were not yet prepared to sell.

The companies then revived talks again in 2014, but pricing and other issues led to a collapse in discussions.

Viacom Inc. (NASDAQ:VIAB) also made a play for Scripps just recently, even offering to acquire the company in an all-cash deal, before the Scripps family eventually accepted Discovery’s offer of about $90 per share.

Long-term Concerns

Analysts, however, raised concerns about how the merged entity would fare in the long run.

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

“Without any material improvement to current ratings and subscriber trends, the timing and cost for Discovery to double down in the U.S. will likely look foolish in hindsight,” MoffettNathanson Research analyst Michael Nathanson said.

Earnings Results

The current state of the cable TV industry reflected on the results of both companies.

Discovery reported adjusted EPS of 68 U.S. cents, missing the consensus estimate of 72 cents.

Scripps, meanwhile, lowered its full-year revenue estimate from 6% previously to 4%. The company also expects segment profit to be flat for the year from a projected increase of 3% earlier.

Discovery plunged 8.21% following the announcement to end the day at $24.60 per share, while Scripps rose 0.58% to close at $87.41 per share.

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