Analysts: Discovery-Scripps Merger Won’t Solve Problems

Cable network business challenged

Reacting to reports that Discovery Communications and Scripps Networks Interactive were in merger talks, Wall Street said that while a combination might make some short-term sense, it wouldn’t solve long term issues.

Related > Discovery in Talks to Combine With Scripps Networks: Report

“With ongoing MVPD consolidation and wave after wave of negative pressures hitting pure-play cable network stocks, there is sound industrial logic for M&A on the network side,” said Michael Nathanson of MoffettNathanson Research.

“Given the mix shift to skinny [virtual] MVPD sports and news bundles, declining viewership trends and soft cable network ad demand, there is a clear need for the non-broadcast-affiliated content owners like Scripps, Discovery, Viacom and AMC Networks to gain distributor negotiating leverage and cost savings through mergers,” Nathanson said in a note.

But while a merger could mean cost savings, international opportunities and better scale, “we don’t think this merger will fundamentally alter the long-term prospects of these companies," he added. "If anything, it does allow for a couple of years of a new narrative to form about future inorganic opportunities."

Scripps had a strong year in advertising in 2016, but matching that will be difficult in 2017, Nathanson said. That might make it a good time for Scripps to sell. But Discovery already has too many networks for a skinny bundle world.

“If ratings and subscriber trends do not improve, the timing and cost for Discovery to double down in the U.S. will look foolish in hindsight,” Nathanson said.

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