Discovery Communications said it signed a definitive agreement to buy Scripps Networks Interactive for $14.6 billion in cash and stock.
The price equals $90 a share, according to the company—up 34% from where Scripps Networks was trading before sales rumors started on July 18. Viacom had also expressed interest in buying Scripps Networks but bowed out of the bidding last week.
The move creates a larger programmer at a time when the industry is consolidating. But the new company still must operate in a challenging environment in which pay-TV subscribers are falling and television advertising spending is growing slowly and facing strong competition from digital media.
Neither company has links to a U.S. broadcaster or major domestic sports rights, so it will remain to be seen how much leverage the combined company will have with distributors.
“This is an exciting new chapter for Discovery. Scripps is one of the best run media companies in the world with terrific assets, strong brands and popular talent and formats,” Discovery CEO David Zaslav said in a statement. “ Our business is about great storytelling, authentic characters and passionate super fans. We believe that by coming together with Scripps, we will create a stronger, more flexible and more dynamic media company with a global content engine that can be fully optimized and monetized across our combined networks, products and services in every country around the world.”
Discovery and Scripps will have nearly a 20% share of ad-supported pay-TV audiences in the U.S., the companies said. Additionally, the combination will be home to five of the top pay-TV networks for women and will account for over a 20% share of women watching primetime pay-TV in the U.S.
The combination is expected to create significant cost synergies, estimated at approximately $350 million, the companies said. The deal is expected to be accretive to adjusted earnings per share and to free cash flow in the first year after close.
“Through the passion and dedication of our incredible employees, and with the support of the Scripps family, we have built a lifestyle content company that touches the lives of consumers every single day,” Ken Lowe, CEO of Scripps Networks Interactive, said in the statement. “This agreement with Discovery presents an unmatched opportunity for Scripps to grow its leading lifestyle brands across the world and on new and emerging channels including short-form, direct-to-consumer and streaming platforms.”
Lowe is expected to join Discovery’s board of directors once the deal closes.
Wall Street said that while the deal produces a bigger company, there are questions about how it fares in a changing TV business.
“While we believe the two companies are likely better positioned together, rather than apart, the longer-term issues facing the industry still remain,” noted analyst John Janedis of Jefferies.
Janedis noted that viewership on TV, and more so cable networks, continues to decline and that the combined company may not solve the skinny bundle challenge going to market with even more networks. “While both companies have largely reality-based programming, the genres/ content are different, with Discovery’s content more easily travelling globally vs. Scripps’,” he said.
But Janedis also noted that the combined company will be a leader in the female demographic, with greater scale on a global basis. “While it could be argued that the move is somewhat defensive by Discovery, scale for programmers will be increasingly important,” he said. “We think the deal is low teens accretive to Discovery, and a 10x EBITDA multiple for Scripps."
Marci Ryvicker of Wells Fargo noted that Discovery's second-quarter revenues were below forecasts and Scripps' also missed its targets and lowered its revenue guidance for the remainder of the year.
"Well, with Q2 results like this, we could see why there's a deal," Ryvicker wrote in a note Monday morning. "In all seriousness, this deal combined with Q2 results suggests how tough the cable net business has become."