The Discovery-Scripps Deal Is Off, Now What?

All merger talks between Discovery and Scripps have ended this month, but the future of both media companies still appears very bright.

Feb 3, 2014 at 5:57PM

About a month ago, Variety reported that Discovery Communications (NASDAQ:DISCA) considered bidding for smaller competitor Scripps Networks Interactive (NYSE:SNI). The deal seemed to make sense as both companies create similar nonfiction content and Scripps' mostly domestic appeal could stand to benefit from the global positioning of a larger company such as Discovery. 

However, in early January, The Wall Street Journal reported that talks between the two companies have ended. Now that the speculation has died down, where do both companies stand? 

Two great content creators
In a previous article, I explained why I saw Discovery and Scripps as two of the best content creators in the business. Both companies have very popular networks which offer viewers unique content that is simply not available anywhere else.

Discovery basically has a lock on the nonfiction, docudrama segment with incredibly popular shows like Deadliest Catch, Gold Rush, and Moonshiners. The company also excels at nature-themed shows via collaborations with BBC on series like Planet Earth and Life, numerous hit shows on its signature Animal Planet network, and its always-popular Shark Week programming.

Scripps, on the other hand, may have an even more finely tuned stable of networks. With popular networks like Home & Garden TV, Food Network, and Travel Channel, Scripps is a leader in the lifestyle-programming segment. The company's channels are so distinct that they essentially have no direct competition.

The best part about both Discovery and Scripps' network brands is that they can create new and compelling content continuously thanks to relatively low production costs. Additionally, both companies mostly provide content with a broad nature which means that they can easily format this content for international audiences.

Although a merger would have been incredible because the content of the two companies shares many similarities, both Discovery and Scripps nonetheless remain unique in the media world.

Discovery vs. Scripps
As it turns out, both Discovery and Scripps have good future positioning. The two companies are just at different stages of growth at the moment. Management at Discovery seems intent on entering new content genres whereas Scripps has been more focused on growing its brands overseas.

Discovery completed the acquisition of the SBS Nordic operations of ProSiebenSat.1 Group in 2013. The move gave Discovery an additional 12 television networks in the area, most notably channels that offer scripted entertainment, which was a first for Discovery. 

The company also made an agreement with France's TF1 Group to increase its stake in Eurosport International from 20% to 51%. Eurosport is a pan-European sports network and this represents Discovery's first foray into sports entertainment. 

Meanwhile, Scripps has been working on increasing its brand awareness in other parts of the world. Most notably, Scripps completed the acquisition of Asian Food Network in 2013, which added approximately 8 million subscribers to the company's international audience. Scripps also distributes Food Network and Travel Channel in Asia and the company has been expanding internationally since 2009. 

The following table breaks down both companies' projected growth rates in 2014: 

Company

Discovery

{%sfr%

Revenue Growth

12.2%

 

EPS Growth

28.4%

11.9%

Both companies are projected to grow well in 2014, although Discovery is expected to lead significantly in terms of both revenue and earnings-per-share growth.

However, Scripps currently trades at a cheaper valuation multiple than Discovery. The former's forward P/E is 17.81 versus 19.11 for the latter. It is also worth noting that Scripps pays a dividend of $0.60 which equates to a yield of 0.80%, while Discovery does not pay a dividend at this time.

Two of the best
Like I concluded in my last article on the two companies which came out in the midst of the merger rumors, both Discovery and Scripps remain interesting growth companies at the current time.

They both have incredible advantages when it comes to content creation. Along with the rapid advancement of technology that allows viewers to watch programming from just about anywhere, which only fuels the demand for new content, the future for Discovery and Scripps looks very bright.

Are Scripps and Discovery still valuable in a post-cable world?
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

Philip Saglimbeni has no position in any stocks mentioned. The Motley Fool recommends Scripps Networks Interactive. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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