Why a Discovery Buyout of Scripps Makes Sense

Recently, Variety reported that Discovery Communications (NASDAQ: DISCA  ) was interested in acquiring Scripps Networks Interactive (NASDAQ: SNI  ) . While nothing has been officially confirmed or denied by either company, the move makes sense, but it also seems unlikely. 

However, if the deal did happen the resulting company would be a top-tier media creator with virtually no direct competition.

The rumor
On Dec. 10, Variety reported that "a source with knowledge of the situation said the prospect of Discovery making a run at Scripps Networks was discussed Tuesday at a Discovery board meeting."

The report went on to say that representatives from both companies declined to comment.

Why it makes sense
Companies in the media industry, particularly the valuable creators of original content, are in high demand now more than ever as newer technologies like streaming devices allow viewers unprecedented access to vast libraries of content that they can view from almost anywhere. This necessitates a continuous supply of new and compelling content and only a handful of companies can deliver in this regard on a consistent basis.

It just so happens that both Discovery and Scripps are such companies, and they are still relatively small compared to industry titans like The Walt Disney Company and Time Warner. Other media companies like AMC Networks and Starz also remain viable buyout candidates as well, especially considering their diminutive sizes.

Scripps seems to be a perfect acquisition candidate for Discovery, considering that the two companies' content lineups would mesh remarkably well. Discovery primarily focuses its content on the natural world with popular networks like Discovery Channel and Animal Planet while Scripps primarily focuses on the how-to lifestyle segment with signature networks like Food Network and Home & Garden TV. However, both companies take similar approaches to content. Both companies' channel lineups primarily focus on the nonfiction docudrama television segment. Almost all of their respective channels place a strong emphasis on learning.

However, there is also overlap between some of the companies' channels. For example, content that appears on Discovery's Destination America is similar to content that appears on Scripps' Travel Channel. Scripps' Travel Channel also bears a striking resemblance to several of Discovery's channels like Science Channel and Discovery Channel.

An acquisition of Scripps by Discovery would make sense for two reasons. First, it would significantly bolster the latter's content lineup by adding popular networks that are unique but similar in style and approach. Second, the deal would significantly cut down on industry competition as Scripps remains one of the few direct competitors to Discovery, in terms of offering similar content, at the current time.

The media industry is a challenging place to be, and one in which consolidation makes a great deal of sense. A stronger content lineup provides a media company with more leverage in negotiations with cable/satellite providers. A company with a wide array of popular channels can bundle weaker channels with stronger ones, which enhances pricing power for content creators.

Why it would be difficult
The major impediment to a potential deal is the sheer size of Scripps Networks. The company, whose shares have risen almost 40% in 2013, is now valued at a market capitalization of $11.8 billion. Discovery Communication's own market capitalization is $29.3 billion, which means that Scripps is more than a third of the size of the company which is looking to acquire it. At the current time, Discovery also only has $560 million in cash along with over $6.5 billion in debt, which means that the deal would probably have to be debt-financed by a company with an already-hefty debt burden. 

These numbers that would seem to argue against the deal happening do not mean that it could not actually happen. However, a buyout of Scripps would be substantial enough that it would be difficult for Discovery to digest at the current time. A much larger company like Disney with significantly more cash would have a much easier time acquiring Scripps.

The result
The resulting company that would emerge from Discovery acquiring Scripps would be a powerhouse media company with a significant stranglehold on the popular nonfiction television segment. It would no doubt be a company that I would consider owning.

However, Discovery Communications and Scripps Networks are fabulous companies with bright futures in their own right. They are both projected to grow their revenue by over 7% and their earnings by over 10% in 2014. A deal between the two would just be an added bonus for investors seeking growth in content creation.

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