Discovery Communications and Scripps Networks, two of the largest factual channel providers and programme producers in the world, have agreed to merge in a transaction valued at $14.6 billion.
The deal will bring together the parent company of numerous factual channel brands including Discovery Channel and Animal Planet, the Eurosport sports business and several European free-to-air channels with the owner of lifestyle channels Food Network and HGTV and stakes in TVN in Poland and UKTV in the UK. According to IHS Markit Channels & Programming Intelligence, Discovery operates 76 channel brands worldwide, including 30 in HD, while Scripps has 31, of which 12 are HD.
Total annual 2016 revenues for the companies were $9.8 billion last year, with Discovery generating 48% of its revenues outside the US and Scripps 16%. Discovery said it expected to achieve $350 million in cost savings by 2019.
The companies said that their combined channel portfolio accounts for 20% of US cable network revenues, and that they together produce 8,000 hours of original content per year and serve seven million video streams a month.
News of the agreement leaked out in recent weeks and was confirmed this morning. Discovery will acquire 100% of Scripps, with 70% of the consideration in cash and the balance in Discovery class C stock. On completion, Discovery shareholders will own 80% of the company. Prominent stockholders John Malone and Advance/Newhouse have already approved the deal. Completion - subject to approval by other shareholders and regulators - is expected early next year.
In today's conference call, Discovery President and CEO David Zaslav said the Scripps acquisition 'checked all the boxes' of the kind of acquisition the company was seeking for further growth and 'long term shareholder value'. While the combined channel portfolio of Discovery and Scripps will certainly be stronger, it might prove tough to convert this into better carriage fee and advertising rate deals in a US pay TV market beset by cord-cutting. While growing the rate of carriage fee growth – based upon the combination of the two companies – may be difficult, maintaining current growth rates will become even easier for the new company.
IHS Markit estimates that US cable network carriage fees growth averages in the high single-digit percentages yearly. This growth in carriage fees has pushed pay TV ARPU upward, leading to a certain degree of cord-cutting. However, new virtual MVPDs like Sling TV and DirecTV Now are reducing the sting from cord-cutting by moving customers to lower-priced alternatives. For programmers like Scripps and Discovery this is a good thing; they continue to receive the same contractual carriage fees, or even higher fees, whether or not the subscriber comes from traditional pay TV or virtual MVPD.
Both companies have several key channel brands, and some smaller digital channels. As IHS Markit has said several times in the past, smaller digital channels will be fodder for cost savings as programmers are forced to make tough choices when looking to reduce spending. Domestically the company will retain several key channel brands, and like Viacom, may adopt a strategy of focusing its effort on the most profitable channels in its family.
Outside the US, Discovery could offer Scripps support in building its distribution. The companies have already done business in some regions, with Discovery buying Scripps programming for its Home and Health channels in Latin America. While Scripps is much newer to the international market than Discovery, it has important footholds in Poland and the UK. In Poland, it owns TVN, a free-to-air broadcaster and pay TV channel operator, with a stake in the NC Plus satellite platform. In the UK, Scripps owns a 50% stake in UK TV alongside BBC Worldwide. UKTV is the biggest pay TV programmer in the UK after Sky.
As well as the international market, Discovery has invested heavily in digital, and is here that the newly-created 'global leader in real-life television' may look to gain the most benefit from the combination. Discovery invested $100 million last October in a partnership with Group Nine Media, which sells diigtal properties including Thrillist, Seeker and The Dodo. In Asia, the group has backed millennial-targeting services VS Media and Tabilabo. Discovery also offers shows on Snapchat's Discover platform and is also developing original content or Facebook, according to Zaslav.
Both companies invest heavily in original programming - to the tune of some 8,000 hours a year - and brands like Discovery's Shark Week and Mythbusters, combined with Scripps lifestyle content on food and travel, could be a compelling proposition on mobile and other digital platforms. The two companies together seven billion streams a month.