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Discovery CEO on Scripps: We Could Create a Terminal Value Tunnel That Makes Us a Big Winner

It's a risk but Discovery Communications Inc. (DISCA) is going to take it.

After weeks of takeover speculation, Discovery said Monday, July 31, it has reached agreement with Scripps Networks Interactive Inc. (SNI) to buy the owner of HGTV, DIY Network and Food Network for $90 a share. The cash-and-stock deal is valued at $14.6 billion including $2.7 billion in assumed debt. The companies anticipated they would close the transaction early next year.

For owners of Scripps Networks, the deal is a windfall. The takeout price -- $63 in cash and $27 in Class C Discovery stock -- is 34% higher than where shares of the cable network company closed on July 18, just before news of the talks sent the stock soaring. By agreeing to be acquired, Scripps CEO Ken Lowe secures a deal that caps more than 30 years at the once modest TV station and newspaper company that grew a set of cable networks that was spun out in 2007.

Those networks, led by HGTV and Food Channel, have had great success attracting women viewers, providing marketers with a direct connection to particular demographics.

For Discovery, the deal is a bet by CEO David Zaslav, who will lead the merged company, and its largest shareholder, billionaire media mogul John Malone, that the two companies' portfolio of nonfiction networks will have greater leverage when bargaining with pay-TV operators, both cable and online. By acquiring Scripps, Discovery will have access to networks with higher operating income, providing a source of revenue to develop so-called direct-to-consumer offerings both in the U.S. and in Europe, where Discovery's Eurosport is a major attraction and Malone's cable networks cover much of the continent.

Scripps shareholders will own roughly 20% of Discovery's fully diluted common stock, and Discovery shareholders will own the remainder. The transaction already has received the blessings of Malone; Advance/Newhouse, another large owner of Discovery shares; and members of the Scripps family, the companies said.

Investors, though, appeared to be skeptical of the deal following the announcement, sending shares of the Silver Spring, Md., company down 7.4% to $24.83 early on Monday. Scripps shares, meanwhile, were up 0.6% to $87.47, still below the takeout price but well above where they was trading just two weeks ago.

Zaslav on an investor call...