Market Insight

Discovery buys SBS Nordic, talks with TF1

December 14, 2012

Tim Westcott Tim Westcott Director – Research and Analysis, Programming, IHS Markit
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Discovery Communications is buying SBS Nordic, a group of free-to-air TV networks and radio stations, from the ProSiebenSat1 group. The deal is valued at $1.7bn (€1.325bn). The US cable network programmer also revealed that it is in talks with TF1 to buy a 20 per cent stake in Eurosport and four French channels.

The two deals will not only increase Discovery's international footprint, but also add scripted fictional programming and sports to its genre portfolio alongside its stable of factual channel brands.

SBS Nordic, which was originally put on the block last year, includes 12 TV networks and 19 radio stations. The TV Norge group is number two in Norway with a 34 per cent share of viewing, according to Discovery while the group's networks are ranked third in Denmark and Sweden with shares of 22 per cent and 19 per cent respectively. The group also operates two TV networks in Finland.

Private equity groups Providence Equity Partners and Nordic Capital were also reported to have been in the last stage of talks to buy SBS Nordic.

Discovery also said today that it has entered exclusive negotiations with TF1 over a three-part deal. Firstly, Discovery will buy a 20 per cent stake in Eurosport, TF1's sports network business, for €170m ($221.6m). The US company will have an option to increase its shareholding to 51 per cent after two years, when TF1 will be able to sell the reminder of its stake. Eurosport distributes channels in 59 countries in Europe and Asia to a claimed 130m subscribers.

In the second part of the deal, Discovery will take over a 20 per cent stake in TF1's French pay TV channels TV Breizh, Histoire, Ushuaia TV and Stylia, paying €14m ($18.2m) in cash. Discovery will have the option of increasing its stake in any one of the channels to 49 per cent in two years.

Finally, Discovery and TF1 Productions will jointly develop programmes for the partners' channels in France and worldwide.

Discovery expects both deals to be completed in the first quarter of 2013. The total $1.9bn cost of the deals will be funded in cash.

At first sight, the agreement to buy SBS Nordic and the partnership with TF1 look like a significant departure from Discovery's core business of operating factual cable networks. SBS Nordic is primarily a free-to-air broadcaster scheduling a mix of programmes and aiming to aggregate mass audiences in relatively small European markets. The Eurosport deal means Discovery is entering a field in which the major players are ESPN and News Corp and local pay TV operators like BSkyB and Canal Plus. Reports that Discovery is also in talks to buy Telecom Italia Media's broadcasting assets in Italy suggest that it has cast its net wide in looking for opportunities to grow its business further outside the US. 

Discovery CEO David Zaslav, however, emphasised that the acquisitions are complementary to its existing international networks - which accounted for 36 per cent of its revenues in the first nine months of 2012 - but that both are 'dual revenue stream' businesses. In other words, both Eurosport and SBS Nordic have a revenue stream from affiliate fees as well as advertising revenue. According to ProSieben's last quarterly report, carriage fees represented 59 per cent of its revenues in Denmark in Q3, 28 per cent in Sweden and 24 per cent in Norway. The free-to-air model is also not unfamiliar to Discovery, as it already operates networks on this basis in Germany, the UK and Spain.

Eurosport meanwhile has a revenue model based on a classic mixed-revenue model of advertising and subscription (although carriage fees are non-existent in some international markets), while its programming costs are maintained at a manageable level because it does not generally compete for big ticket exclusive rights like league football, instead focusing on niche sports like skiing, road cycling, athletics and tennis. Its low-risk approach to programming matches that of Discovery, which according to Zaslav owns the vast majority of the content it distributes on its networks around the world.

The partnership with TF1 will have the additional benefit of increasing Discovery's revenues in a major European market where it has hitherto been a marginal presence. TF1, meanwhile, will gain a major international partner with the ability to bolster the performance of its channels in a market which is becoming increasingly competitive.

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