Rise of Netflix forces cable networks to vie for acquisitions
Traditional media companies are feeling pressure to grow
Consumers are spending more time on the web and advertisers are following
Discovery Communications and Viacom, two cable network owners hurt by the rise of Netflix and YouTube, have held separate talks to combine with Scripps Networks Interactive, owner of HGTV and the Food Network, according to a person with knowledge of the matter.
Scripps, with a market value of $8.7 billion, surged 10 per cent in late trading. Shares of Discovery, the $15 billion owner of Animal Planet and TLC, also rose, while Viacom, the $14.5 billion parent of Nickelodeon and MTV, was little changed.
Traditional media companies that built billion-dollar businesses from cable are feeling pressure to grow via acquisition after losing viewers to online video services and social networks. Consumers are spending more time on the web and advertisers are following.
By combining, Scripps and Discovery or Viacom could also strengthen their hand in negotiations with pay-TV companies like Comcast Corp.
“There’s more pressure on cable players around the world, satellite and mobile players, to merge or figure out how to offer all those together,” Discovery chief executive David Zaslav told reporters last week at Sun Valley, Idaho, conference hosted by Allen and Co.
“Two to three years from now you’ll buy that all from one person. We have great, exclusive content to provide, so they’re going to need us.”
All three companies declined to comment.
Discovery took a look at Scripps back in late 2013, and analysts have long speculated that the company, whose networks include the Discovery Channel, might revisit the idea of a merger with the owner of the Travel Channel.
Viacom adds a twist to those considerations, raising the possibility of a bidding war. The Wall Street Journal reported on the Discovery-Scripps talks earlier Tuesday. Reuters reported on Viacom’s involvement.
New York-based Viacom, with sales of $12.9 billion, is the largest of the three, but is coping with recurring losses at its Paramount Pictures film studio, high debt and viewership declines at some of its youth-oriented channels, including MTV. Chief executive Bob Bakish stepped in last year after months of management upheaval.
All three companies have multiple share classes that empower insiders with super voting rights to seal or block potential deals.
Billionaire Shari Redstone and her father Sumner control about 80 per cent of the voting stock at Viacom, while cable billionaire John Malone holds a 28 per cent voting stake in Discovery, based in Silver Spring, Maryland, according to filings. Discovery’s sales totalled $6.5 billion in the past year. Discovery shares rose 7.9 per cent in late trading.
Family members associated with Scripps Networks, based in Knoxville, Tennessee, control 92 per cent of the company’s voting rights. Revenue there totalled $3.4 billion last year.
Adding to the pressure on cable networks, pay-TV distributors like Charter Communications and ATandT have grown through acquisitions in recent years, leading investors to conclude smaller channel owners also need to combine as well to keep pace.
Cable and satellite-TV providers pay fees to network owners for the right to carry their channels, and the negotiations have gotten even more intense now that more pay-TV subscribers are cutting the cord.
Smaller media companies have struggled to earn a position for their networks in new TV packages that offer a more select line-up of channels, known in the industry as skinny bundles.
Hulu and YouTube left Discovery’s networks out of their new services, and YouTube also didn’t include programming from Scripps. Viacom isn’t in either of those packages.
Even larger cable-network owners have been grappling with the changes in the industry. Time Warner, home of TNT and HBO, agreed last year to an $85.4 billion takeover by ATandT. Walt Disney, which owns ESPN, is developing an online service to reach sports fans who aren’t using traditional cable.
Though small, Scripps has valuable assets in HGTV, Travel Channel and Food Network. HGTV is the fourth-most watched US network in prime time this year, with an average of 1.51 million viewers a night through July 16th, according to Nielsen data. The Discovery Channel is ranked 11th, with 1.18 million viewers.
In December, Scripps chief executive Ken Lowe told Bloomberg that his company was better off being small and can thrive “as long as we are good storytellers.”
“Everything is not going to be a Comcast-NBC brand or ATandT-Time Warner brand,” Lowe said in an interview. “There’s going to be some interesting vibrant brands that will still hang in there.”