Reacting to reports that Discovery Communications and Scripps Networks Interactive were in merger talks, Wall Street said that while a combination might make some short-term sense, it wouldn’t solve long-term issues.
“With ongoing MVPD consolidation and wave after wave of negative pressures hitting pure-play cable network stocks, there is sound industrial logic for M&A on the network side,” said Michael Nathanson of MoffettNathanson Research.
“Given the mix shift to skinny vMVPD sports and news bundles, declining viewership trends and soft cable network ad demand, there is a clear need for the non-broadcast-affiliated content owners like Scripps, Discovery, Viacom and AMC Networks to gain distributor negotiating leverage and cost savings through mergers,” Nathanson said in a note.
But while a merger could mean cost savings, international opportunities and better scale, “we don’t think this merger will fundamentally alter the long-term prospects of these companies. If anything, it does allow for a couple of years of a new narrative to form about future inorganic opportunities,” he said.
Scripps had a strong year in advertising in 2016, but matching that will be difficult in 2017, Nathanson said. That might make it a good time for Scripps to sell. But Discovery already has too many networks for a skinny bundle world.
“If ratings and subscriber trends do not improve, the timing and cost for Discovery to double down in the U.S. will look foolish in hindsight,” Nathanson said.
John Janedis of Jefferies noted the merger might not solve the skinny bundle challenge.
Janedis estimates that Discovery could reduce costs by $200 million and that a deal could be accretive by 15%.
“The issues facing the industry are well-known and this potential deal doesn't change them, though arguably could position the companies better than individually, though not without risk. As for as the group, a 5% move is likely, though those viewed as potential takeout candidates will trade even higher,” Janedis said in a note.
Todd Juenger of Bernstein also says he does not find the potential deal compelling because it doesn’t solve the businesses’ fundamental problem.
“What if Sears merged with Home Depot,” he asked, questioning whether that would be a good deal for Home Depot shareholders.
With both Discovery and Scripps running at high-profit margins, Juenger said any cost savings would be short-lived.
And a combination would hurt leverage with distributors rather than help because while Scripps had a handful of unique networks receiving relatively low fees, adding in Discovery’s portfolio would create a package less attractive to operators.
At the same time, if Discovery, Scripps and other non-broadcast affiliated cable programmers are considering a direct to consumer strategy, Juenger said a merger isn’t necessary to collaborate. Also an OTT service would risk damaging their traditional, lucrative distribution.
Juenger also thought that another bidder emerging for Scripps was unlikely.
“The bad news is there aren’t many companies looking to increase their exposure to cable TV networks,” Juenger said. “The good news for Scripps is, they are small enough and ‘quality’ enough. It’s not crazy to imagine some bidders being interested. Disney comes to mind.”
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