Discovery Communications is reportedly in talks with Scripps Networks International about merging their broadcasting assets. While the discussions are far from confirmed, analysts at MoffettNathanson Research (MNR) issued a timely note to investors that examined the potential benefits.
MNR says: “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 to gain distributor negotiating leverage and cost savings through mergers. While there will likely be ample cost synergies, international revenue opportunities and improved relative 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.”
MNR asks rhetorically ‘why now’ for the discussions, and reminds readers that Scripps has not had the best of trading years, neither in terms of viewer ratings or financials. It had a negative $116 million in Corporate losses last year, and a merger with Discovery could generate – says MNR – $400 million in cost synergies. That’s real money on anyone’s balance sheet.
But Scripps isn’t alone with problems, suggests MNR. “For Discovery, we remain concerned that they have too many networks to protect in this new world and that the move to grow their European sports business will be more difficult than Wall Street appreciates.”
MNR says that the real benefits could flow from Scripps capitalizing on Discovery’s clout when it comes to carriage fees and margins. NMR suggests that Discovery’s EBITDA margins in the US are close to 60 per cent, while Scripps are nearer 50 per cent. Just getting Scripps closer to Discovery in operating margins could deliver – perhaps – $300 million.
“If anything,” says MoffettNathanson, “the combination has potential internationally where SNI just recently made inroads. There may be enough SNI programming to pull into Discovery’s continued investment in international distribution.”