Discovery picks up channel for $20 million

NEW YORK — Media entrepreneur Bud Paxson stunned Wall Street on Wednesday when he sold control of the Travel Channel to Discovery Communications for $20 million, less than three months after he bought it for $75 million.

Discovery, controlled by cable giant Tele-Communications Inc.’s programming affiliate Liberty Media, agreed to buy 70% of the Travel Channel and add it to their platform of cable networks, which already includes the Discovery Channel, the Learning Channel and Animal Planet. The price values the entire network at $28.5 million.

The stunning deal is a huge setback for Paxson, who had claimed he bought the network at a “great bargain” in mid-June. Instead, Paxson Communications Inc. effectively realized a loss of $51.5 million on the sale, or two-thirds of the initial outlay.

Not right?

Wall Streeters were taken aback by the deal. “Something’s not right,” said one analyst, puzzled at the arithmetic. Paxson stock fell 37¢ Wednesday to close at $11.62, while Liberty Media stock fell 6¢ to $26.75.

The sale highlighted how tough it is for companies like Paxson, which owned no other cable networks, to survive in an industry dominated by cable network giants. “Its clearly tough to make stand-alone networks work. It costs money, for one, and stand-alone networks don’t have the money to put into promotion and support,” Schroder & Co. analyst Niraj Gupta said.

Paxson’s execs proved they can claim victory out of any situation. Paxson’s VP for corporate development Seth Grossman insisted the deal was “a home run,” because the Travel Channel eventually would be worth “billions” as a result of Discovery’s management of it, translating to a profit eventually on Paxson’s remaining 30% of the network.

“(Discovery is) putting behind it their programming support, their affiliate and sales support and marketing support,” Grossman said.

He conceded that, after taking control of the channel six weeks ago, Paxson realized “you had to have distribution and programming” to make the channel work.

“When you’re a single network you don’t have any leverage in promotion,” Grossman added. Paxson’s media interests are mainly in TV broadcasting, although Paxson helped start the Home Shopping Network in 1985.

Travel currently is hampered by a low subscriber base of 20.8 million and the prospects that subscribers would decline further in the next couple of years as existing carriage agreements expired. It also is losing money and the losses are expected to continue for some time to come.

Discovery’s management of Travel immediately improves its prospects as TCI, which owns 49% of Discovery, is likely to be more interested in carrying the network. At the same time, Discovery can run Travel cheaper because of its existing networks.

“We feel that Travel Channel is a logical extension and complements the business we already own,” Discovery Communications president Judith McHale told reporters on a conference call. McHale and Discovery Networks president Jonathan Rodgers both said it was too early to comment about how Travel would be marketed to cable operators.

Both dodged questions about Paxson’s original deal, although investment bankers say Paxson outbid Discovery the first time around. McHale confirmed that Discovery had talked with Travel’s original owner, Landmark Communications Inc., earlier this year but she claimed not to remember whether Discovery made a bid at that time.

“I’m not going to comment on his transaction. We feel very comfortable with the transaction we have structured,” McHale said.

The deal does extricate Paxson from any future financial liability. Although Discovery will own only 70% of the network, it will fund all of its losses. Rodgers said those losses wouldn’t likely approach $50 million, however.

Grossman said Paxson hopes to build a “transactional” side to the Travel Channel’s business, based on Paxson’s experience in starting the Home Shopping Network. McHale said it was “too early for us to make a commitment” to this idea although it is being evaluated.

Schroder’s Gupta said Discovery had a “great deal,” effectively paying less than $2 a subscriber — well below the price usually paid for cable programming.

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