Editor's Corner—2 winners and 2 losers from the $14.6B Discovery-Scripps deal

Handshake
Ben Munson

Discovery Communications and Scripps Networks Interactive may seem like the most obvious beneficiaries of Discovery’s $14.6 billion bid to acquire Scripps and its portfolio of networks including HGTV and Food Network. But by looking out ahead and to the peripheries of this deal—which, if approved, will give the combined company control of 20% of ad-supported pay-TV audiences—it’s easy to spot several other potential winners and losers.

Winners

1. Scripps Networks Interactive: As the secular headwinds of sagging subscriber numbers and falling ratings have the cable network industry bracing for impact, Scripps may have bought itself some shelter from the storm with this deal.

After a miss on second-quarter advertising revenue guidance and a lowering of its full-year guidance, Scripps was in danger having MoffettNathanson keep its sell rating on the company.

“Sadly, while we expected that, we have to raise our SNI recommendation from Sell to Neutral due to this deal," wrote Michael Nathanson in a research note titled "Well played, sir."

While both Discovery and Scripps will benefit from the expected cost synergies of approximately $350 million, Scripps got the added boost of being deemed a worthy acquisition target while Discovery endured a 9% stock dip for taking on the financial leverage to make the deal happen.

2. Cord cutters and shavers: Discovery CEO David Zaslav has been adamant that pay TV needs an entertainment-only bundle that it could offer for closer to the modest price range of $10 per month demanded by SVOD behemoths like Netflix. Viacom CEO Bob Bakish is convinced that product will arrive sometime within the next calendar year.

With Discovery and Scripps now combined, that nonsports bundle could be closer to reality, though perhaps outside of the traditional pay-TV ecosystem.

In talking with media and investors following the deal announcement, Zaslav said that Discovery and Scripps might now have the combined scale to launch their own lifestyle channel streaming service and charge $10 to $20 per month. That model could potentially give Discovery another avenue for monetizing its content – whether by subscription fees or ad revenue – that isn’t reliant pay-TV operators. And that could provide a less expensive route for consumers who want “Shark Week” and “Fixer Upper” without the ESPN.

Losers

1. Pay-TV providers: If the scourge of cord cutting truly does portend the end of pay TV, the industry could become every man for himself. If that’s true, Discovery and Scripps just muscled up in order to squeeze as much blood from the stone before the sun sets on pay TV.

As Business Insider points out, Discovery plus Scripps controls 19 cable channels with 5 of out the top 10 among females aged 25-54.

Earlier this year, analysts estimated that Discovery’s solo position in cable guides would help it continue growing affiliate revenues.

With Scripps in tow, and that reach hitting 20% of ad-supported pay-TV audiences and more than a 20% share of women watching primetime pay TV in the U.S., that leverage will undoubtedly swing even further in Discovery’s favor.

2. Viacom: Calling Viacom a loser in all of this is a bit of a stretch, especially considering the turnaround Viacom’s begun to manifest since Bakish took over. But technically, if reports are true, Viacom did lose out to Discovery in a bidding war over Scripps.

Moreover, Viacom now has to contend with a Discovery that has surpassed Viacom in total value. Using Discovery’s market cap plus the purchase price of Scripps, Recode estimated that Discovery is now worth $22 billion. Based on the share prices that determined the deal cost, the combined companies' market cap is closer to $27 billion. That valuation is sure to change somewhat as stock prices fluctuate and Scripps is eventually absorbed, but for now the figure puts Discovery ahead of Viacom and has the combined company closing in on Viacom’s per subscriber affiliate fee rates.

Factor that in with accelerating media consolidation and it could put Viacom in a defensive position where it feels extra pressure to latch onto programmer to keep from being swept away in a swiftly changing media landscape.—Ben | @fiercebrdcstng

This article was updated to include a revised market cap estimate for a combined Discovery and Scripps.