Shares of Scripps Networks (NYSE:SNI) rallied 7% Wednesday morning amid reports that Discovery Communications (NASDAQ:DISCA) is exploring a buyout bid for the parent of the Food Network and Travel Channel.
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However, Citigroup (NYSE:C) expressed doubt about the likelihood of a deal, citing a lack of strategic sense.
A tie-up between Scripps and Discovery, which owns TLC and Animal Planet, would represent one of the biggest transactions in the media space in recent years and could kick off a flurry of cable deals.
According to Variety, Discovery discussed the idea of making a run at Scripps Networks at a board meeting on Tuesday.
Discovery hasn’t made a formal offer for Scripps and may not decide to proceed, The Wall Street Journal reported. Discovery’s interest is being partially driven by concern about the fallout of possible consolidation among cable and satellite operators that sell subscription television, the paper reported.
Reports indicate Discovery has previously approached Scripps about a possible transaction, but the Scripps family trust that used to control the company wasn’t interested.
Scripps declined to comment on the reports, while Discovery didn’t immediately respond to an inquiry.
Citigroup downgraded Scripps to "sell" from "neutral" on Wednesday, saying the only way a deal would make sense would be if Discovery believed it could expand Scripps into international markets more aggressively.
"We do not believe this is the case. As such, we think it’s unlikely that the press reports are true," Citi analyst Jason Bazinet wrote in a research note, adding that the stock reaction is "unwarranted."
Bazinet also noted that any deal would likely not be all cash because it would push leverage too high.
Based in Knoxville, Tenn., Scripps was spun off from newspaper publisher E.W. Scripps (NYSE:SSP) in 2008 and had a market capitalization of $13.6 billion entering Wednesday’s trading day.
In addition to the Food Network, Scripps owns HGTV, DIY Network, the Cooking Channel and Great American Country.
Scripps shareholders cheered the prospects of a deal, bidding the stock 7..02% higher to $80.53 on Wednesday morning. The rally leaves Scripps up 39% so far this year.
Shares of Discovery advanced 1.21% to $86.20 in recent trading, extending its 2013 rally to almost 36%.
An acquisition of Scripps could mark the start of a slew of transactions in the cable sector, with other rumored targets including AMC Networks (NASDAQ:AMCX), Starz (NASDAQ:STRZA), Viacom (NASDAQ:VIA) and Discovery itself.