Discovery, Scripps Seek Reward Even as Media Sector Faces Risk

David Zaslav has long been recognized as a media executive with a relentless yen for movement. The CEO is known among his Discovery Communications staffers for taking a brisk walk almost every day to get to his New York offices and for tinkering endlessly with the company’s cable networks. Now he’s gaining recognition for accelerating the media industry’s desire to consolidate.

Discovery on July 31 confirmed its plans to buy Scripps Networks Interactive in a deal valued at $14.6 billion in cash, stock and debt. Should the pact close as expected in 2018, Zaslav will oversee properties ranging from TLC to Travel Channel, Food Network to Investigation Discovery. In all, the network will have more female viewers to offer advertisers and command greater leverage in talks with cable and satellite distributors.

Yet the two sides can’t mask the difficult conditions facing owners of TV networks at a time when viewers are migrating to streaming video and mobile screens. “This shotgun marriage is a clear sign that the cable network industry has seen the future, and that future requires deep cost cutting and increased scale to mitigate both the current headwinds and the inevitable painful changes that lie ahead,” said Michael Nathanson, an independent media-industry analyst.

The media business is filled with several small to mid-size companies — AMC Networks comes to mind — that have a lock on lucrative audience niches. But in an era when telecommunications providers and cable distributors are snapping up content houses to gain more sway over consumer choice, their future seems onerous. Comcast’s $13 billion purchase in 2009 of a controlling stake in NBCUniversal set in motion a shift in terrain. Companies producing content must also have some hold over the ways in which consumers connect to their favorite programming.

Recent deals speak to this new pressure. AT&T, which already purchased satellite distributor DirecTV in 2015 in a deal valued at approximately $48.5 billion, is preparing to close an $85.4 billion pact to snap up Time Warner, the owner of HBO, CNN, Warner Bros. and DC Comics. Charter Communications broadened its national footprint by acquiring Time Warner Cable in May 2016 for approximately $65 billion. The Murdoch family is intent on acquiring the remaining shares of European broadcaster Sky that its 21st Century Fox does not control.

And Lionsgate acquired Starz earlier this year in a deal valued at around $4.4 billion — a combination seen as a way for media magnate John Malone, who had stakes in both, to create a new competitor.

Discovery and Scripps weren’t faring so well on their own. As they touted their looming merger, both companies acknowledged lackluster operating results. Discovery’s second-quarter profit fell, and Scripps trimmed its 2017 outlook, citing advertising trends. “Well, with Q2 results like this, we could see why there’s a deal,” quipped Wells Fargo analyst Marci Ryvicker in a research note. “The message on current operating trends at both companies was downbeat,” said Credit Suisse analyst Omar Sheikh.

Placing Scripps under Discovery’s aegis could allow the two companies to move forward more decisively. Zaslav acknowledged Discovery would have enough programming under its command to either launch a “skinny bundle” of programming or join others seeking to do the same. Discovery, which has placed more focus in recent months on its international operations,  is also likely to try to broaden the availability of Scripps’ assets overseas.

Future moves may not involve just TV. “Some of these brands have a very passionate base that may not necessarily, for the future, be a linear platform, or a platform that we have necessarily thought about in the past,” said Ken Lowe, the Scripps chairman and CEO who will join Discovery’s board.

Behind the scenes may stand one of the industry’s savviest players. Malone, who used his ownership of a large cable distributorship to gain stakes in many of the sector’s biggest companies, is an investor in Discovery, and is backing the deal. In recent months, Malone has helped drive the pairing of Lionsgate and Starz; a merger of home-shopping companies QVC and HSN; and is said to be investigating a possible stake in Spanish-language broadcaster Univision. Who knows how an investment in a combined Discovery-Scripps may be used in the future?

In months to come, however, all eyes will be on Zaslav. Under his supervision, Discovery has become more involved with European sports broadcasting, bolstered the company’s digital-content holdings, and pulled back somewhat in the U.S. from some of the tabloid-y fare that had begun to populate some of his networks. Now, this former NBC cable executive – he had a hand in the launches of CNBC and MSNBC – will have to jockey more directly with the likes of the Roberts family and their Comcast, or the Murdochs and their Fox

Speaking to analysts as the deal was unveiled, Zaslav suggested the Scripps purchase would not mark the end of his ambitions. “We’ll have a very flexible balance sheet with a lot of artillery. We are not out of bullets over the next two years. We still have enough room to do some selective purchases that are smaller if we need to,” he said.

And at a time when fickle media consumers will pick whatever type of video screen best suits their needs, the tie-up of Discovery and Scripps may not be the last of its kind. “There is no final step for any media company today,” said Zaslav.

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