Discovery closes on Scripps deal, maybe 3rd time lucky

Consolidation among pay TV networks was always going to lead to further consolidation among US TV networks and this week Discovery Communications and the Scripps Network are rumored to be in talks once again for a merger. They have been repeatedly in on off mergers for about 3 years.

The overwhelming reason is that when you have plenty of leading TV channels which are known to have audience pull, you have a better chance of being able to land pay TV retransmission deals at the right level of revenue. The story broke in the Wall Street Journal and was repeated in Reuters.

Discovery is famous for its Discovery Channels, and other channels such as TLC, Investigation Discovery, Animal Planet, Science and the Oprah Winfrey Network. It has Discovery Kids in Latin America and Eurosport in Europe, a rapidly growing sports channel.

Scripps has mostly channels about practical things around the home, do it yourself market leader HGTV, as well as the Food and Travel Channels. The bulk of its revenues come from HGTV and the Food Network, last quarter some $529 million of its total US revenues of $736 million. Like Discovery it has assets overseas, including TVN in Poland.

Most of that US revenue is advertising, about 70% of it, with a falling percentage as “distribution” which includes retransmission. In the past most US networks managed far closer to a 50/50 split between those revenue types. For Discovery those revenues splits are 56%/44%.

Viacom is also known to have been interested in acquiring Scripps, and may enter the negotiations, sources said.

But despite the overwhelming logic of big being beautiful in US Networks, the fact that negotiations are on for about the third time suggests there are some sticking points, almost certainly over valuation.

Revenues for Discovery Communications were about double those of Scripps last quarter, at $1.63 billion, but it is not as profitable as Scripps by margin hence the current valuation of $9.9 billion placed on Scripps on the stock market, up 20% on the news of the talks. Discovery is only valued at $16.4 billion itself.