Discovery's Simpler Form

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Discovery Holding Co. signed a non-binding letter of intent last week with Advance/Newhouse Communications that will finally consolidate the companies' interests in Discovery Communications Inc. into a single, publicly-owned entity.

The three-step deal is expected to close in the second quarter of next year. According to the agreement, Discovery Holding, which includes a 66.7% interest in DCI and a 100% interest in Ascent Media Group. Ascent, a Santa Monica, Calif.-based film postproduction house, will be spun off into a separate company.

At the same time, DHC will be combined with a new publicly traded entity, tentatively called NewCo. Advance/Newhouse, which owns a 33% stake in DCI, will contribute that stake to the new company in exchange for preferred stock in the new entity. Upon closing, those preferred shares will be converted into a one-third interest in NewCo.

Advance/Newhouse will also retain certain rights regarding actions of the new company and will receive two board seats.

The deal, which has been expected for months, will clean up what had been a complicated structure for DHC and will give Discovery Communications a deal currency.

In a memo to employees, Discovery Communications CEO David Zaslav and founder John Hendricks said that the deal will make DCI a “stronger, more competitive and more opportunistic in pursuing targeted acquisitions that strengthen our position as the No. 1 nonfiction media company in the world.”

Miller Tabak media analyst David Joyce said that the deal falls short of original expectations that the Liberty Media-controlled holding company most likely would in some fashion buy out the Newhouse stake in Discovery Communications.

But the new structure does unlock value, he said. He estimated a public DCI would be worth $32 per share. Shares of Discovery Holdings, by comparison, closed at $26.69 per share on Dec. 13.

Joyce said that under the old structure, Discovery Holdings could not consolidate DCI or gain access to its cash flow.

“That was keeping a lid on the valuation,” Joyce said. “Now that there is going to be one entity that holds all of Discovery Communications, that will be fully consolidated. It will be a regular stock now.”