Scripps, Discovery deal odds debated as reported talks boost media space
While research firm #Citi sees a deal as likely, Credit Suisse analyst Omar Sheikh believes the Journal’s initial report has “low credibility.”
Yesterday, The Wall Street Journal said that Discovery Communications is in discussions to merge with Scripps Networks. A similar report from Reuters added that Viacom (VIAB) also had held talks to buy Scripps.
CREDIT SUISSE QUESTIONS DEAL CHANCES
Commenting on the news, Credit Suisse’s #Sheikh told investors that he believes the Journal’s report “looks vague,” and his initial view is that it has “low credibility.”
Combining the two portfolios of unscripted cable networks has some industrial logic, but previously reported discussions between the companies probably came to nothing because the price and structure of a transaction could not be agreed upon, the analyst contended, adding that he struggles to see what might have changed now. Sheikh reiterated an Underperform rating and a $24 price target on Discovery’s shares.
BULLISH ON DEAL
Citi analyst Jason #Bazinet, on the other hand, told investors that he views the reports as “credible” and finds it likely that Discovery and Scripps Networks reach an agreement. Furthermore, Bazinet argued that the pressures on the traditional cable network ecosystem are acute enough and valuations are low enough that he can see merits to this potential combination. Assuming a 20% premium is offered to Scripps, a deal would likely be about 10% accretive to Discovery, Bazinet noted, citing his M&A math.
Meanwhile, #JPMorgan analyst Alexia #Quadrani said she sees both a strategic and financial rationale for a merger between Scripps Networks and Discovery Communications, pointing out that a combined company would have greater leverage with domestic distributors and advertisers. Discovery could also help Scripps with its international rollout, #Quadrani contended, adding that there is potential for cost and tax synergies.
However, she believes that with no terms mentioned in any of the press reports on the deal talks, it is difficult to evaluate any potential transaction. Further, the analyst noted that the speculation “may end up just being chatter” coming out of last week’s media executive conference in Sun Valley. Nonetheless, Quadrani believes the press reports should have a “very positive influence” on media stocks, which she noted have been out of favor. The analyst expects to see particular outperformance from heavily shorted media names such as AMC Networks (AMCX).
In Wednesday afternoon trading, shares of Scripps Networks have jumped almost 15% to $76.87, while Discovery Communications’ stock has gained 4% to $27.09 and AMC Networks is up 4% to $59.25.
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