Scripps, Discovery Stocks Soar on Deal Speculation

Scripps stock rises 20% as market anticipates Discovery union
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Scripps Networks Interactive stock rose 20% and Discovery Communications shares increased more than 7% in early trading after reports surfaced late Tuesday that the two were in early merger talks.

According to a report in the Wall Street Journal, Discovery and Scripps have held early discussions about a possible merger. While there is no guarantee that a deal would be realized, news about further consolidation in the programming business was enough to goose the stocks. Scripps shares went as high as $80.45 each (up 20% or $13.43 per share) in early trading Wednesday and were priced at $76.64 (up 14.4%) at 10:40 a.m. Discovery shares reached $27.92 per share (up 7%) before settling down to $226.80(up 2.8%) at 10:40 a.m. It was the single highest increase for both stocks in months.

Reuters reported later that Viacom has also held informal talks with Scripps Networks, which added to the increases in the latter’s stock price. Viacom shares were up 1.5% ( 55 cents each) to $36.01 per share at 10:40 a.m.

Discovery and Scripps have been down this path before. In late 2013, the two held preliminary talks but shelved them after the Scripps family, which controls Scripps Networks, decided it didn’t want to sell.

Discovery and Scripps Networks officials declined comment.

Both companies have struggled along with the rest of the industry to address changing viewing habits and falling ratings as consumers migrate from linear television to online, SVOD and OTT offerings. Discovery's stable of channels includes the Discovery Channel, TLC, Animal Planet, ID Discovery and other networks with a focus on non-fiction programming that would appear to mesh nicely with SNI's Food Network, HGTV, Travel Channel and GAC programming assets.

Analysts were split about a possible Discovery/Scripps Networks combination, with MoffettNathanson media analyst Michael Nathanson writing in a research note that pairing the networks groups won’t solve their problems. While Scripps Networks had surprisingly strong ad revenue growth last year, one indication that it may be a good time to sell, it will be difficult to duplicate. 

“While there will likely be ample cost synergies, international revenue opportunities and improved relative scale, we don’t think this merger will fundamentally alter the long-term prospects of these companies,” Nathanson wrote.  “If anything, it does allow for a couple of years of a new narrative to form about future inorganic opportunities.”

On the other side of the spectrum, RBC Capital Markets media analyst Steven Cahall called the potential deal a “sign of the times,” adding that he saw it as one of the most logical combinations in the content space as added scale should improve the merged entity’s leverage in carriage negotiations.

“We think investors have viewed consolidation among smaller players as an eventual inevitability, but this potential deal would suggest that the corporates are more proactive than we had previously thought,” Cahall wrote. “From here, we will be looking for a better picture of the deal, assuming it's real, and contemplating what other transactions, if any, could follow. “‎

Credit Suisse media analyst Omar Sheik wrote in a note to clients that he believed a Discovery/Scripps Networks combination had “low credibility.”

“The report looks vague, and our initial view is that it has low credibility,” Sheikh wrote. “Combining the two portfolios of unscripted cable networks has some industrial logic, but previously reported discussions between the companies probably came to nothing because the price/structure of a transaction could not be agreed. We struggle to see what might have changed now.”

UBS Securities media analyst Doug Mitchelson wrote in a research report that while there is a strong case for the synergies in a deal – he estimated between $150 million and $250 million – pairing the two programmers may only make things worse.

“Having 18 combined networks in a world shifting towards skinnier bundles might only compound secular challenges,” Mitchelson wrote.

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