A Discovery Bid for Scripps Wouldn't Make Sense, Some Analysts Say

Better Leverage in Pay-TV Talks Would Take a While to Take Hold While Growth Slows

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Discovery Communications may be considering a bid for Scripps Networks, the owner of cable channels like Food Network and HGTV, but some analysts who follow the companies are struggling to understand the logic.

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Variety reported Tuesday that the board of Discovery Communications, which owns networks such as TLC and Animal Planet as well as its eponymous flagship, had discussed acquiring Scripps during a recent meeting. Scripps' portfolio and Discovery's would be a "natural fit," the report suggested, an argument S&P Capital IQ analyst Tuna Amobi echoed in a research note.

Two other analysts quickly sent out notes, however, suggesting that the strategic imperative wasn't clear.

A combination could generally boost the companies' leverage in negotiations with pay-TV carriers, for example, but that benefit would be hard to realize as long as Discovery and Scripps' carriage deals continue to come up for renewal at different times.

"What's more, benefits from the affiliate deals and negotiating leverage would be offset by the fact that the deals are not co-terminous, and the benefit to affiliate fees from re-negotiating deals would take quite some time to be realized," RBC Capital Markets analyst David Bank wrote in a research note.

Todd Juenger, analyst at Bernstein Research, also downplayed the improved leverage from such an acquisition. "While it certainly wouldn't hurt, we don't believe a combined Discovery/Scripps would add much incremental negotiating power -- mostly because we believe both parties already have tremendous negotiating power, stemming from their existing very low affiliate fee rates relative to their audience size and audience passion levels," Mr. Juenger wrote.

The biggest argument against a deal is Discovery's focus on international growth and Scripps' lack of major international assets.

"The problem with Discovery, or anyone, buying Scripps is essentially the same problem we have recommending the SNI stock to investors: you have to pay a relatively high price for a purely domestic asset," Mr. Juenger wrote, arguing that adding Scripps would slow down growth. "Cable groups should not be paying a premium to double-down in the U.S.; they should be expanding internationally."

Indeed, Discovery CEO David Zaslav said at a conference Monday that its sales growth may be slowing in the U.S. but is strong abroad. Mr. Zaslav said his focus has been on international expansion, leading him to spends more than half of his time overseas.

Acquiring Scripps could also delay Discovery's acquisition of the remainder of Eurosport, Mr. Juenger wrote. In November it was reported that Discovery was looking to take a major stake in the pan-European sportscaster, which could allow Discovery to sell pan-European advertising, Mr. Juenger noted.

Scripps has long been considered a candidate for an acquisition, particularly since the dissolution of the Edward W. Scripps trust in 2012, which gave the Scripp's family members more direct control over their shares. This isn't the first time Discovery has been mentioned in the marketplace as a likely buyer of the company.

And Mr. Amobi, the S&P Capital IQ analyst, wrote Wednesday that a Discovery bid for Scripps was looking better as time goes on.

"While such deal had been speculated in recent years, we see an increasingly plausible and conceivable scenario for the union of two leading providers of non-fiction programming content, amid a new wave of pay TV consolidation that could reshape the dynamics of multi-year affiliate negotiations," Mr. Amobi wrote.

Discovery and Scripps declined to comment on the possibility of an acquisition.

The best argument for Discovery to buy Scripps is to unlock the international opportunity Scripps cannot pursue itself, according to Mr. Juenger. While Scripps' portfolio makes sense globally, it's difficult for the company to get international distribution, at least on basic tier packages, largely because Discovery and others have blocked them out.

"In many markets, Discovery could, at a minimum, swap out their worst performing networks and replace them with a Scripps network – that's the synergy," Mr. Juenger wrote. "In some cases Discovery wouldn't even have to swap out. They could leverage their distribution relationships and market power to secure distribution for the Scripps networks, which Scripps could not get on their own."

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