Knoxville, Tenn.-based television company Scripps Networks Interactive (NYSE: SNI) recently agreed to acquire Virgin Media's (Nasdaq: VMED) stake in UKTV. Scripps said the acquisition would help it broaden its international footprint and help Virgin Media exit the business.
The deal
Fourteen-year-old British cable and satellite TV channel operator UKTV is equally owned by Virgin Media and BBC Worldwide. Scripps agreed to purchase the 50% share of UKTV from Virgin Media for about $556 million. The amount includes equity, outstanding preferred stock, and debt charges.
How does Scripps win?
The deal is a significant opportunity for Food Network owner Scripps to expand into key markets like Britain and Europe. This will enable the company to participate in one of the world's largest television markets dealing in multichannel, dual revenue stream media businesses.
UKTV has 36 million viewers per month. In the previous quarter, it contributed profits of $11.2 million to Virgin Media. It has 10 strong channel brands such as GOLD and Alibi, and complementary channel websites for each of them. Lifestyle, entertainment, and documentary channels from UKTV fit well with the type of content Scripps provides. These channels air award-winning shows and have widespread availability. Such factors make UKTV very lucrative for Scripps, as weak advertising revenues and low retail spending threaten media competitors such as Discovery Communications (Nasdaq: DISCA) and the industry as a whole.
How do BBC and Virgin Media win?
BBC seeks to get more value from digital rights with the help of this partnership. Moreover, the company is in talks with Scripps about raising its stake to 60% from 50%.
Virgin Media -- the U.K.'s second largest telecommunication service provider -- wanted to sell its UKTV stake, concluding that it was not a core asset, in order to focus more on the cable business. The company will use the money from this sale to expand its high-speed broadband networks. Simplifying the business should enhance Virgin's efficiency.
The Foolish bottom line
This deal doesn't appear to be an expensive one for Scripps, since it already has strong free cash flow. At the same time, the wider audience is very likely to benefit the company in the coming quarters.
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