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Who Wins in Discovery Communications' Buyout of Scripps Interactive?

In this MarketFoolery segment, host Chris Hill, Million Dollar Portfolio's Jason Moser, and Stock Advisor Canada's Taylor Muckerman discuss the impact of this joining of two cable-focused media companies. With Scripps (NASDAQ: SNI) bringing to the table such high-profile channels as HGTV and the Food Network, the buyer may be getting the better end of the deal. So why did investors respond by cutting Discovery Communications' (NASDAQ: DISCA) share price on the already anticipated news? And what does the long term look like for the niche channels these companies feature?

A full transcript follows the video.

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Chris Hill: We have to start with the deal of the day, and that is Discovery Communications buying Scripps Interactive in a deal valued at $14.5 billion. This is a cash-and-stock deal. This is one that was well telegraphed, and because of that, the buyout price for Scripps Interactive was $90 a share. The stock had been in the mid-$60s not too long ago, and once these reports started to come out, then the stock was getting bid up. So that's why you're not seeing any kind of a pop today.

I am a little surprised, though, Jason, that Discovery Communications is down more than 7%, because, again, this was pretty well telegraphed. So I'm just wondering if the sell-off in Discovery Communications is people think the buyout price is too high. People were hoping it was going to be all stock and no cash whatsoever? But other than the price tag, there's nothing new about this deal.

Jason Moser: No. I wouldn't say it's a valuation thing. This deal values Scripps at a little bit less than 10 times EV to EBITDA, which is basically in line with Discovery's valuation today before the market opened. Generally, the perception of this deal, at least the way I see it, is that this is a much more important deal for Discovery than it is for Scripps. I think Scripps is the more compelling part of this deal. It has more compelling properties that they've demonstrated, perhaps, a bit more long-term success, certainly here domestically, at least. They are both companies with big audiences, but also big challenges as the media space starts to change.

So I think the advantage here in this day and age, there should be a lot of good viewer data that these guys can go on to really whittle down the best offerings that they can then bring out to the market. And as the skinny bundle evolves and these over-the-top live streaming deals start to evolve, I think Scripps is a big deal here. I think that's going to be that no-brainer content that virtually everyone is going to want to have on their plate in some capacity.

Hill: Food Network, HGTV.

Moser: Yeah, all of that good stuff. It's just relatable content, particularly here domestically. I think it just has a very wide audience ranging in age. I know they like to say that it's primarily a female audience. Maybe the math bears that out. But it's content that really caters to both male and female audiences. At the end of the day, we always talk about content being king. There's a lot of great content that both of these companies get out there. With Discovery, it's going to add a decent chunk of debt to the company's balance sheet.

Taylor Muckerman: I think over $2.5 billion.

Moser: Yeah. It's not like they can't handle it. They both have very strong cash flow-generating models. But, again, this is something that makes you wonder a little bit about Discovery. Clearly, over the past five years or so, Scripps has been a better performer, and I think that mainly speaks to the content offering, and how it's gained more traction over time.

Muckerman: You mentioned international. That's where a lot of people say this could probably be the biggest gain for Discovery. Fifty percent of their business is international, while Scripps isn't quite there yet. So maybe they have the channels, the deals that they've worked out with international partners, to then get Scripps TV shows exposed to a more international audience. But they are very similar companies in terms of their distribution. So I'm wondering how they're going to come of age.

We talked about over the top, the skinny bundles. I saw somewhere that people suggested they could throw a bundle together for $5 a month. Personally, I wouldn't pay $5 a month for it, but it's slightly more than they get an affiliate fees combined. So that's certainly an option. I think it's a no-brainer if you continue to see cable subscribers cut the cord.

Then you talk about Amazon and Netflix, combined for over $10 billion in spending in original content this year, that's almost the price of this deal. So the competition there is worrisome, if I'm these two companies. And when I first saw it, I was like, didn't this already happen? Because they've talked about this twice, and now it seems like it's finally going to happen.

Hill: And I know this is not the impetus for a deal like this, but when you think about advertising -- because that is still a meaningful amount of revenue for these networks -- you think about HGTV, you think about the Food Network. If you are a major company in those two spaces, you're advertising on those networks.

Moser: There's no question about it. You watch any of those channels, and you see those ads over and over and over again. Wayfair is one that advertises a lot on those channels. Again, they've been doing what they've been doing for a while. I think both companies on their own have some pretty neat, compelling content. Together, this will help them maximize efficiencies. They really should have a lot of good data to be able to go on, and being able to whittle down the most compelling content on both sides of the coin there.

And then, I think internationally, Discovery has done a great job trying to build that business out internationally. It's been, I guess, not quite as well received as maybe they had hoped. There's some opportunity there for Scripps as well. And you can't dismiss the potential for additional shows. This really neat content, because it's real life, it's stuff that changes every day. You don't have to get too terribly creative with it. I'm not saying they're not creative, but it is kind of stuff that just happens. It's based on real life.

Muckerman: Yeah, it's not as scripted as most other cable companies. It's a lot of unscripted content.

Moser: I mean, people are going to be buying houses 20 years from now, and they're going to be jumping through the same sorts of hoops, and science isn't going anywhere. Discovery really shines brightly on that front, and Scripps shines very brightly on the homeowner front, the food front. It's all very relatable content for households in general.

Hill: Have you guys ever used, when you travel domestically, the Food Network website, the restaurant finder they have?

Muckerman: No, I have not.

Hill: You can go on there and it's basically like, "I'm going to this city," and you type that in, and any restaurant or food vendor that has ever been featured on the Food Network will pop up, and then you can be like, "Now I'm going to check out this restaurant." Yeah, it's a neat little tool.

Muckerman: Can you click over to an episode? A clip?

Hill: Yeah. A lot of times they have video.

Moser: You have a guilty pleasure, a show on Scripps or Discovery that you're like, "I probably wouldn't go broadcast this," but I'm going to ask you to broadcast it today. Guilty pleasure?

Hill: Oh, Diners Drive-Ins, and Dives.

Moser: I would say the same thing, yeah. Triple D!

Muckerman: [laughs] That's why they bought it. 

Hill: I'm not saying I want to be on a cross-country flight and sit next to Guy Fieri.

Muckerman: I wouldn't turn it down, either.

Hill: But some of those places are really great.

Muckerman: I wonder what his cut from this deal is.

Moser: I really enjoy that show.

Hill: Guy's probably doing well, don't you think?

Muckerman: [laughs] Yeah, he's doing all right.

Chris Hill owns shares of Amazon. Jason Moser has no position in any stocks mentioned. Taylor Muckerman owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Netflix, and Wayfair. The Motley Fool recommends Scripps Networks Interactive. The Motley Fool has a disclosure policy.