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Discovery, Viacom have held talks about combining with Scripps

Discovery Communications Headquarters in Silver Spring. (The Daily Record /Maximilian Franz)

Discovery Communications Headquarters in Silver Spring. (The Daily Record /Maximilian Franz)

A combination of  Scripps Networks Interactive Inc. with either Discovery Communications Inc. or Viacom Inc. could help the media companies cut costs, gain negotiating leverage with distributors and expand internationally as the U.S. TV business faces new pressures.

But any such partnership won’t solve the fundamental challenges facing them in a fast-changing industry where the best-positioned companies own fewer cable channels, not more, media analysts say.

Discovery and Viacom, two cable network owners hurt by the rise of Netflix Inc. and YouTube, have held separate talks to combine with Scripps, owner of HGTV and the Food Network, according to a person with knowledge of the matter. Shares rose Wednesday on the news.

Scripps, with a market value of $8.7 billion, surged as much as 20 percent in trading Wednesday, its biggest increase since October 2008. Shares of Discovery, the $15 billion owner of Animal Planet and TLC, jumped as much as 7 percent, the most since November. Viacom Inc., the $14.5 billion parent of Nickelodeon and MTV, rose 2.5 percent.

Discovery, which generates about half its revenue outside the U.S., could help Scripps expand its international footprint, especially in Europe, where Scripps has acquired an interest in Polish TV operator TVN. A combination could also help them gain some negotiating leverage with TV distributors since both have been excluded from new online TV services.

“The pressures on the traditional cable network ecosystem are acute enough — and valuations are low enough — that we can see merits to this potential combination,” Jason Bazinet, an analyst at Citigroup Inc., said in a note Wednesday.

Skinnier Packages
But a deal between the companies may actually hurt, not help, Discovery and Scripps in their talks with distributors, according to Todd Juenger, an analyst at Sanford C. Bernstein. & Co. The television industry is moving toward less-expensive slimmed-down TV bundles to compete on price with Netflix, forcing programmers to cull their stable of cable networks, not add to them.

“If you combine Discovery and Scripps you now have, literally, 20 networks,” many of which distributors don’t want, Juenger said in a note Wednesday. “That’s already a problem for Discovery, but we think adding Scripps makes it worse.”

What’s more, none of three companies air live sports in the U.S., widely considered to be one of the last key draws for large television audiences that drive advertising.

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.

“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 Officer David Zaslav told reporters last week at Sun Valley, Idaho, conference hosted by Allen & 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 Officer 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 percent of the voting stock at Viacom, while cable billionaire John Malone holds a 28 percent voting stake in Discovery, based in Silver Spring, Maryland, according to filings. Discovery’s sales totaled $6.5 billion in the past year. Discovery shares rose 7.9 percent in late trading.

Family members associated with Scripps Networks, based in Knoxville, Tennessee, control 92 percent of the company’s voting rights. Revenue there totaled $3.4 billion last year.

Cord Cutting
Adding to the pressure on cable networks, pay-TV distributors like Charter Communications Inc. and AT&T Inc. 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 lineup 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 Inc., home of TNT and HBO, agreed last year to an $85.4 billion takeover by AT&T. Walt Disney Co., 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 U.S. network in prime time this year, with an average of 1.51 million viewers a night through July 16, according to Nielsen data. The Discovery Channel is ranked 11th, with 1.18 million viewers.

In December, Scripps Chief Executive Officer 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 AT&T-Time Warner brand,” Lowe said in an interview. “There’s going to be some interesting vibrant brands that will still hang in there.”