July 31, 2017

Breakingviews: Discovery’s cable deal rests on rosy assumptions

by Breakingviews.

Discovery’s cable deal rests on some rosy assumptions. The producer of “Shark Week” is buying Food Network and HGTV owner Scripps Networks Interactive for $14.6 billion. Cost savings won’t cover the premium and getting distributors to pony up for more content will be a hard sell in a churning media market.

Like all deals that involve media mogul John Malone, who holds a voting stake in Discovery, this one is thorny. For starters, Discovery and Scripps have been mulling a merger for years. Any tie-up requires wooing the Scripps family, which holds more than 90 percent of the vote.

Discovery finally succeeded by offering a 34 percent premium. That’s better than the 22 percent uptick the Dolan family got when in 2015 they gave up their cable network to Altice for $17.7 billion in cash.

Likewise, the Scripps family opted to take 70 percent of $90 per share in greenbacks, bucking any tax concerns, and the rest in Discovery shares. Scripps shareholders will end up owning 20 percent of the combined company in Class C shares though Malone, along with the Newhouse family, owner of Vanity Fair, will have most of the voice.

Discovery said it will find some $350 million in cost savings by eliminating corporate overhead and such. Taxed and capitalized, the synergies have a present value of about $2.5 billion, some $500 million short of the premium the company is paying.

Adding to the degree of difficulty is the whopping $19 billion in net debt the combined entity will carry, according to a back-of- the-envelope estimate. At nearly five times EBITDA of some $4 billion, that gives Discovery very little room. The company will suspend buybacks for roughly two years and devote all its cash to paying down debt.

These are turbulent times for media firms. Mid-tier cable networks like Discovery and Viacom are searching for more channels to give them negotiating power with distributors. Carriers, meanwhile, are looking to slim down their offerings as consumers cherry-pick better networks or simply cut the cable. With some 20 channels under its belt, Discovery may have a hard time convincing the likes of Comcast to pay more. The Scripps family wisely opted to take the money and run.


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