Discovery Denies It's on the Block


Discovery Communications Inc. and NBC have each had their share of suitors. And last week, it was revealed that the Peacock Network, in an urge to merge, unsuccessfully courted the cable programmer this summer.

The discussions between DCI and NBC were "serious," a source familiar with the talks confirmed, but there were disagreements on a number of issues. As a result, DCI and NBC couldn't come to an agreement on a deal and the negotiations ended, the source said.

But the disclosure of the failed merger, first reported by The Washington Post
last Tuesday, again raised questions about DCI's future as an independent company.

Publicly, officials at DCI continue to maintain that the Bethesda, Md.-based programmer — owner of a cable-network stable that includes Discovery Channel, Animal Planet, TLC, Travel Channel, Discovery Health Channel and a bouquet of digital networks — is not for sale. But privately, insiders at DCI are fretting about who may eventually acquire the company — and speculating about it.

And some officials at Discovery Networks U.S. internally have expressed frustration about the difficulty of competing against those media behemoths that have been created through consolidation, according to a source familiar with the company.

DCI's price tag is a prime roadblock to any sale, according to Wall Street sources. DCI's valuation, once at around $12 billion, has ballooned — on the conservative side — to between $25 billion to $30 billion following Viacom Inc.'s $3 billion purchase of Black Entertainment Television earlier this year, according to one investment banker who asked not to be named.

"Discovery has growth characteristics; the core network is great; they've launched a number of emerging networks that have good distribution," the investment banker said. "Everyone wants to own more programming and whoever buys them, presumably, they can take a fair amount of cost out."

The scarcity of available cable networks for sale has also added to DCI's higher valuation, according to the banker. This boost in value is not lost on Liberty Media Corp., which owns 49 percent of DCI.

Liberty has insisted on $19 billion for its DCI interest, the investment banker said. That would catapult DCI's total price tag to about $38 billion — enough to induce sticker shock in any buyer.

DCI's attractive programming assets, including its vast international holdings and the fully distributed domestic Discovery Channel, have drawn more than one acquisitive eye. For example, at a conference in April, Viacom president Mel Karmazin cited Discovery Channel as a network he'd be interested in buying.

Like DCI, NBC has also drawn the attention of would-be buyers. Last week at the Western Show, AOL Time Warner Inc. vice chairman Ted Turner told an audience that in 1995 he came close to acquiring the NBC broadcast network, which is owned by General Electric Co.

But Turner said he was "brokenhearted" when Time Warner Inc. chairman Gerry Levin — now CEO of AOL Time Warner — vetoed Turner Broadcasting Systems Inc.'s proposed $5 billion purchase of NBC.

DCI and NBC face the same problem: While they have considerable programming holdings, they're just not as big as their media rivals, and that places them at a competitive disadvantage in terms of synergies and leverage. DCI has no broadcast holdings, and therefore can't use retransmission consent for TV stations as a bargaining chip for cable carriage. NBC has limited cable outlets with which to repurpose broadcast programming and spread costs.

DCI, which is expected to post $2 billion in revenue this year, and NBC have an ongoing relationship that set the stage for merger talks, in that Discovery Channel airs the Peacock-produced Deadline Discovery .
"We have had a number of conversations with NBC and a number of business partners about future opportunities and initiatives," said David Leavy, DCI's senior vice president of communications. "But the company is not for sale."

NBC declined to comment. Liberty couldn't be reached for comment.

This summer, after talks with DCI broke off, NBC went on to acquire Hispanic programmer Telemundo Communications Group Inc. for $2.7 billion.

"NBC has been competing with media giants in the broadcast and cable business, and has been trying to bulk up as a corporation," said The Yankee Group media and entertainment analyst Adi Kishore. "To that extent, they've obviously been looking around for properties that have been well-suited to them."

In addition to the broadcast network, National Broadcasting Co.'s assets include CNBC and MSNBC, as well as stakes in Rainbow Media Holdings Inc., Madison Square Garden Network, A&E Network, The History Channel, ShopNBC and Paxson Communications Corp.

NBC's main cable outlets — like DCI — specialize in nonfiction programming. But there were other potential synergies between the two companies. If NBC and DCI had merged, the digital network Discovery Kids could have provided programming for an NBC Saturday-morning children's block. And that still might happen.

Last week, the Los Angeles Times
reported — and several sources confirmed — that both NBC and the Fox broadcast network are looking to have outside companies program their low-rated Saturday morning slots. NBC and Fox would essentially sell that weekend morning time to others.

DCI and Nickelodeon are among the companies talking to NBC about Saturday mornings, with Discovery Kids willing to ante up roughly $5 million for NBC's slot, a source said. Leavy declined to comment, as did Nickelodeon, Fox and NBC.

While DCI continues to shrug off talk that it's on the block, others are skeptical about the resolve of DCI's owners, which include not only Liberty, but Cox Communications Inc., Advance/Newhouse Communications and DCI founder and chairman John Hendricks.

If Liberty chairman John Malone can get a hefty price on one for his properties through a tax-free transaction, such as receiving the stock of a buyer — be it GE or a company like Viacom — he'll do it, according to one Liberty insider.

"Malone and Liberty have no emotional attachment to any of these assets," that source said, describing DCI's disadvantages as that it is a "mature," non-liquid holding."

But the investment banker disagreed.

"Liberty sort of controls the destiny of that company [DCI]," he said. "A lot of people are interested in Discovery, but Liberty has not been amenable to that. NBC is one name that I've heard, but it's been resisted."

Another executive familiar with DCI noted that the programmer made a number of corporate cutbacks this summer, including layoffs, a mandate that employees use all their built-up vacation time this year (so it isn't carried on the books in 2002) and even ending the practice of paying for employee parking.

"They did so much belt-tightening this summer you knew then they were dressing it up for sale," that executive said.

Back at that time, the names of both NBC and Barry Diller's USA Networks Inc. surfaced as potential buyers of DCI, according to that source. USA Networks couldn't be reached for comment.

Leavy acknowledged that DCI has cut costs related to vacations, parking and the layoffs. But he denied that those actions were a prelude to a potential sale.

"It's a challenging economic environment, and we've looked at ways to reduce costs," Leavy said.

He also noted that in November DCI's board — which includes Malone — approved a five-year business plan for the company presented by Hendricks and DCI COO Judith McHale.

"Our shareholders are very committed to the company and expect substantial growth in the years ahead," Leavy said.

Cox couldn't be reached for comment. But back in January, MSO president Jim Robbins shot down published reports that DCI was for sale.