Uncertain Strategic Fit Between Discovery and Scripps
Both media firms focus on unscripted content, but it is unclear if a combined firm would have more success in being carried on new pay-TV platforms.
Discovery (DISCA) and Scripps (SNI) have recently renewed discussions about a potential merger, according to a report in the Wall Street Journal, released during the evening of July 18. The report did not include any details concerning any potential price for or structure of the rumored merger. The two firms entered into merger discussions back in 2014, but did not reach an agreement, owing to the Scripps family, which controls over 90% of the voting shares. Separately, Reuters reported that Viacom (VIAB) had also held talks to buy Scripps. Shares of both Scripps and Discovery rose sharply in afterhours trading. We are maintaining our narrow moat rating for all three firms, along with our respective fair value estimates of $79, $36, and $53 for Scripps, Discovery, and Viacom.
The merger of Discovery and Scripps has been a popular combination, given both companies' focus on unscripted content and Discovery's ability to help Scripps expand internationally. While a potential deal could make sense financially, we believe that the long-term strategic fit is less certain. By combining the two firms, the surviving management team will have effectively doubled down on unscripted content during a period of uncertainty about the over-the-top, or OTT, future of the format. As we have previously noted, both Amazon and Netflix have passed on buying content from Discovery and Scripps in a meaningful way. Discovery’s channels have also been passed over by the two most recently launched OTT pay-television providers, YouTube and Hulu, as well as by Sling TV, currently the largest player. While the main Scripps channels are available on Sling and Hulu, YouTube passed on the channels despite their low affiliate fee structure (less than $1 per month for all three channels). Offering a combination of the more expensive Discovery channels and the lower-priced Scripps networks will more likely result in a total lack of carriage for the combined package.
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Neil Macker does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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