Cable Deal Bets on Comfort-Food TV -- WSJ

By Joe Flint and Sarah Rabil Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 1, 2017).

Continue Reading Below

Discovery Communications Inc. has agreed to buy Scripps Networks Interactive Inc. for $11.9 billion, a bet that a larger footprint in lifestyle programming will help it weather cable-TV upheaval.

A bigger portfolio of channels that specialize in so-called comfort-food television would give the combined company an edge in talks with advertisers, who covet female and younger viewers gravitating to shows such as "Property Brothers" and "House Hunters" on HGTV and "Shark Week" on Discovery Channel.

A critical mass of programs about home renovations, cooking contests and the like put Discovery and Scripps in a position to offer a web-TV bundle directly to consumers, who are "cutting the cord" to cable at a fast pace and turning to slimmed-down offerings from Hulu and other competitors.

It will also give the combined firm more heft with programming distributors that are under pressure to curb monthly cable fees passed through to media companies.

News of the deal overshadowed the companies' quarterly earnings reports, both of which fell short of Wall Street expectations. That prompted Marci Ryvicker, an analyst at Wells Fargo, to put out a note titled: "Well, Good Thing They're Combining Because Q2 Results Were Underwhelming."

Continue Reading Below

Discovery shares closed 8.2% lower at $24.60 on Monday, while Scripps rose 0.6% to $87.41.

Under the terms of the agreement, announced Monday morning, Scripps shareholders will receive $90 a share, $63 of which will be in cash and $27 a share in Class C Common shares of Discovery stock. The price is a 34% premium to the level where Scripps shares were trading before The Wall Street Journal reported that the companies were in talks.

Including Scripps's debt, the deal is valued at a total of $14.6 billion.

The seeds of Monday's deal were planted last November. Discovery Chief Executive David Zaslav and Scripps CEO Ken Lowe participated in a panel discussion about family values in the media at the Vatican, where they met with Pope Francis. The two have been close friends for three decades and often spend time together in East Hampton, N.Y.

Over dinner in Rome, the pair discussed the challenges facing their companies and initiatives in getting content straight to the consumer.

Mr. Zaslav's interest in Scripps increased when he saw how strongly Scripps programminghad performed in Latin America. Executives at Discovery's Home & Health channel earlier this year suggested that Mr. Zaslav reach out to Mr. Lowe to acquire more content, but Mr. Zaslav already was thinking of a deeper relationship, a person with knowledge of the matter said.

When Scripps executives in May started to put out feelers to potential suitors, including Viacom Inc., Discovery approached them soon after, people familiar with the matter said. At the Allen & Co. conference in Sun Valley, Idaho, early last month, Mr. Zaslav and Mr. Lowe were inseparable.

Last week, Scripps informed Viacom that it was passing on its offer to focus on Discovery. Mr. Zaslav and his wife spent Saturday at Mr. Lowe's Knoxville, Tenn., home, where they had lunch as Scripps's board contemplated the deal.

Discovery owns networks including Discovery Channel, Animal Planet and TLC. Scripps operates HGTV, Cooking Channel and Food Network among others.

The two companies account for 13% of overall cable viewership but receive just 7% of the monthly cable fees consumers pay, according to RBC Capital Markets.

The merged company will control four of the five major cable networks with the highest percentages of female viewers -- TLC, HGTV, Investigation Discovery and Food Network, according to Nielsen. Advertisers want female viewers because they tend to have a big say in household purchases.

Discovery said it would be able to expand Scripps's channels into more overseas markets, which could help generate significant additional revenue. The combined company is also touting its short-form video production, which will help it gain more viewers and ad dollars on social-media platforms.

The deal could put pressure on other media companies that must defend their turf on the cable dial. Industry experts say AMC Networks Inc. could be the next compelling target. It isn't part of a big conglomerate that owns broadcast or sports networks, which cable distributors find most difficult to drop. An AMC spokeswoman declined to comment.

The deal will lift the profile of Mr. Zaslav, who had a roughly two-decade career at NBC before joining Discovery in 2007. He has led a transition of Discovery from being primarily known for its serious educational fare to a mix of documentary-style programming and over-the-top reality TV -- shows like "Here Comes Honey Boo Boo" and "Naked and Afraid." Lately, the pendulum at the company has swung back to content with higher aspirations.

He has launched new channels, including crime-focused Investigation Discovery, which has become a huge hit with female viewers. And he has been as aggressive as any media CEO in international expansion: Operations outside the U.S. accounted for 47% of the company's $6.5 billion in total revenue last year.

Discovery said second-quarter revenue rose 2% to $1.75 billion, shy of analysts' estimates. Scripps lowered its revenue guidance and reported second-quarter U.S. advertising sales growth of 2.2%, which also fell short of expectations.

The deal is expected to close by early 2018, pending approval by shareholders and regulators.

Mr. Zaslav is a close associate of John Malone, the cable mogul who owns a nearly one-third voting stake in Discovery and sits on its board.

Mr. Malone, who has significant interests in companies from Liberty Media Corp. to Charter Communications Inc., has been a driving force in the industry's mergers and acquisitions and has talked up the need for small players in the content world to merge, particularly as cable and broadband providers have gone through their own wave of big deals.

Charter acquired Time Warner Cable in 2016. AT&T Inc. agreed last year to buy Time Warner Inc.

Mr. Zaslav didn't rule out other deals. "We're not out of bullets. We still have room to do some selective purchases," he said.

Discovery is securing a purchase of Scripps after more than one failed attempt over the last decade. Three years ago, talks between the two companies broke down, in part because the Scripps family didn't appear ready to sell.

The family, which collectively controls 91.8% of Scripps voting shares, entered into an agreement to vote in favor of the deal, as did Mr. Malone and the Newhouse family, which is also a major Discovery shareholder.

After closing, Scripps shareholders will own about 20% of Discovery's shares and Discovery investors will own 80%. The acquisition is expected to create about $350 million in cost savings and add to adjusted earnings in the first year, Discovery said.

Mr. Lowe, who was already planning to step down in 2019, is expected to join Discovery's board.

Write to Joe Flint at joe.flint@wsj.com and Sarah Rabil at Sarah.Rabil@wsj.com

(END) Dow Jones Newswires

August 01, 2017 02:47 ET (06:47 GMT)