Discovery Sees Big Returns on Scripps Networks Buy

Go apps for HGTV, Food Network coming soon
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It’s still in the honeymoon period but Discovery Inc. appears quite smitten with its recently completed acquisition of Scripps Networks Interactive.

Discovery reported a loss in the first quarter, but CEO David Zaslav chalked the results up to this being a "transitional" period for the company, with expenses associated with the transaction including higher debt and restructuring costs.

But financial benefits are coming.

[Respected Ad Sales Exec Price Set to Leave Discovery]

“Thus far, I can unequivocally say, we love this combination even more now than when we first announced it,” Zaslav said during Discovery’s earnings call with analysts Tuesday (May 8).

Discovery sees opportunities to boost revenues—it will be launching Go Apps for Scripps networks HGTV and Food Network in short order—as well as further cost synergies.

“We are raising our cost synergy target from the initial $350 million run rate within two years that we had laid out, and now expect to achieve at least $600 million of run rate cost synergies alone within the first two years of close or by March 2020, with an eye towards additional cost savings as we dig deeper and more broadly into the transformation,” said Discovery CFO Gunnar Wiedenfels.

The costs savings come from several areas. They include reducing head count, real estate consolidation, more efficient marketing efforts, coordinated global procurement, and the use of Scripps content on Discovery networks to reduce the cost of acquiring programming.

Those cost saving will drop to the bottom line. Zaslav called Discovery a cash-flow machine, and his target is to double Discovery’s cash flow to $3 billion.

[Zaslav Gets 13% Raise in 2017]

Discovery provided guidance for full-year earnings, saying that pro forma constant currency adjusted OIBDA growth should be in the mid-single digit range. (Reported OIBDA will be lower because Scripps revenue and earnings didn’t start flowing into Discovery until March 6.)

Wiedenfels said that in the second quarter, Discovery expects both U.S. advertising growth and affiliate growth to be in the low single digits.  

Zaslav said he expects big things in the upfront. 

“We see real near-term opportunity from driving our domestic wallet share of pay-TV advertising around this year’s upfront, with negotiations having just begun, following our well-received presentations to Madison Avenue,” he said.

He noted that Scripps has historically done a better job of converting its ratings into ad dollars. 

“If you look at it from a power ratio perspective, many people have done the math," he said. "They were at a 1.1 versus a 0.8 for us. That’s certainly something that we’re hoping to be able to get some benefits out of.”

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