It's 10 weeks since Discovery announced it's buying Scripps. Bringing the Discover family and food networks together.
As the dust settles, does the new biz look tasty?
Key Stats
| Ticker | DISCA |
|---|---|
| Sector | Television Broadcasting |
| Latest price | $21.72 |
| Date | 05 October 2017 |
| Financials | Merger Document |
| Presentation | Announcement |
| Website | http://ift.tt/107ZkLk |
1. How's the merged biz going to look?
Here are the highlights:
- Combined company will have nearly 20% of ad-supported pay-TV viewership in the U.S.
- Becomes home to five of the top female networks in ad-supported pay-TV with over 20% share of women watching primetime in the U.S.
- 8,000 hours of original programming annually
- Over 7 billion monthly streams creates leading short-form, mobile-first digital player
So it's going to be a broadcasting powerhouse in the US, with the Discovery Channel, TLC, Animal Planet, HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel. And Internationally with Eurosport, TVN in Poland and their JV with the UK's BBC called UK TV.
They've provided some pro-forma financials in the merger document and here's what the figures look like. Though it's a little fishy as 1+1 equals less than 2. Why's the margin get trashed? Weird!
| Proforma | DISCA 2016 | SNI 2016 | Combined | DISCA 1H 17 | SNI 1H 17 | Combined |
|---|---|---|---|---|---|---|
| Revenues | $6.5bn | $3.4bn | $9.9bn | $3.4bn | $1.8bn | $5.1bn |
| Operating Profit | $2.1bn | $1.1bn | $2.2bn | $1.1bn | $0.7bn | $1.6bn |
| Margin | 32% | 32% | 22% | 32% | 39% | 31% |
| EPS | $1.96 | N/A | $1.09 | $1.01 | N/A | $1.09 |
Though broadly speaking, we can think of a $10bn of revenue business generating over $2 a share in earnings.
2. How'd they do apart?
If we look at the forecasts for the two businesses on their own, they've grown steadily, generating good earnings and have been forecast to continue doing so, on a stand alone basis.
| Revenues | 2012A | 2013A | 2014A | 2015A | 2016A | 2017E | 2018E |
|---|---|---|---|---|---|---|---|
| Discovery | $4.5bn | $5.5bn | $6.2bn | $6.4bn | $6.5bn | $6.8bn | $7.2bn |
| Scripps | $2.3bn | $2.5bn | $2.6bn | $2.7bn | $2.9bn | $3.5bn | $3.7bn |
| EPS | 2012A | 2013A | 2014A | 2015A | 2016A | 2017E | 2018E |
|---|---|---|---|---|---|---|---|
| Discovery | $1.24 | $1.49 | $1.66 | $1.58 | $1.96 | $2.23 | $2.50 |
| Scripps | $4.44 | $3.40 | $3.83 | $4.66 | $5.18 | $5.51 | $5.49 |
With that in mind, I can only assume the brokers on Wall Street will be equally happy when the two companies become one. On top of that the manage has said:
Significant cost synergies estimated at approximately $350 million (i.e. less than 10% of costs) Expected to be accretive to Adjusted Earnings per Share and Free Cash Flow in first year after close 50% of synergies achievable by end 2018, 100% by end of 2019
So perhaps there will be some merger costs that eat into earnings in 2018, but it sounds like it's back to business ASAP! And we could see margins jump from 31-32% to as high as 35%. Nice.
3. Should we worry about the debt?
Given there is a big cash payment to SNI shareholders, the debt levels are going to rocket :( Discovery is forecasting Total debt to profit of 4.8x on closing, and that it'll take 2 years to get to a more manageable 3.5x.
They don't pay dividends, and they won't do any buybacks in the near term, until the debt level is lower. So yes, it's higher than I'd like, but they've got a plan to get it to a reasonable level.
4. Still a minnow in media?
Okay, it's big talk saying they'll be the biggest "ad-supported" broadcaster in the US. In reality there are a lot of mega firms above them. Perhaps CBS and AMC are the closest in profile?
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| Discovery Communications Inc. | $6,586M | 63% | 14% |
| Scripps Networks Interactive, Inc. | $3,472M | 41% | 29% |
| Comcast Corporation | $83,972M | 33% | 18% |
| Walt Disney Co | $55,500M | 30% | 21% |
| Charter Communications Inc | $40,833M | 37% | 2% |
| Time Warner Inc | $30,123M | 28% | 17% |
| DISH Network Corp | $14,794M | 21% | 24% |
| CBS Corporation | $12,630M | 23% | 38% |
| Viacom, Inc. | $13,170M | 21% | 31% |
| AMC Networks Inc | $2,795M | 63% | 555% |
When it comes to valuation, we can probably assume the figures of New Discovery aren't going to be far off the figures of old Discovery. So 10 times earnings feels about right.
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| DISCA.O | $7,979M | 10x | 12% | 0% | 11% |
| SNI.O | $11,200M | 16x | 7% | 1% | 10% |
| CMCSA.O | $181,889M | 19x | 9% | 2% | 12% |
| DIS | $155,197M | 17x | 7% | 2% | 9% |
| CHTR.O | $110,553M | 94x | 15% | 0% | 11% |
| TWX | $80,502M | 17x | 10% | 2% | 8% |
| DISH.O | $25,212M | 24x | -1% | 0% | 7% |
| CBS | $24,104M | 13x | 16% | 1% | 8% |
| VIAB.O | $11,732M | 7x | 6% | 3% | 18% |
| AMCX.O | $3,821M | 9x | 11% | 0% | 32% |
That's not far off AMC and a nice discount to CBS. Though clearly these folks are a poor also ran to the big boys.
5. Failing to excite Wall Street!
So despite good logic to the deal, nice growth both revenues and earnings, and an unaggressive valuation, the boys and girls on Wall Street just don't care.
They say Hold, even though they see 20% upside to their price target of $25.55. It really seems unfair. Okay, DISCA has disappointed on earnings multiple times the last 2 years, but Scripps has managed expectations well. But with the valuation anything but aggressive and a nice plan in place... is the lack of enthusiasm justified?
6. A tedious formula to the merger
Perhaps the problem is the complex structure of the deal? An SNI shareholder is supposed to get $63 in cash and $27 in stock. Though if the Discovery price falls a lot, the Scripps shareholders may be a little more cash / a little less shares. The details are in the merger document but clearly create some uncertainty.
And if you are worried the deal might not happen, the merger document has a curious discussion about other companies both telecoms and media approaching Scripps. :) I wonder who there were... and now that they didn't get it, what they are sniffing around!
7. Are there enough catalysts?
I'm tempted to say yes!
- Their content strategy looks good: Ad funded; Subscriptions; Short Form. Ensuring they generate value regardless of the screen size.
- They still have room to grow internationally
- Margins can grow
- The media business is still a cash machine, in a good economy
Though we need to remember, all the benefits of the merger can't start until the deal is done! And that's not expected until early next year.
Okay, they don't make hits like Frozen or Game of Thrones but who cares, I don't want my stocks to entertain me. ;)
Sure, the stock may be stuck at the $22 level for the next 2 quarters, as the deal closing approached. But if I'm a fan, maybe it's time to buy a little Discovery. Or go crazy, and split the funds between the two stocks.
Though please remember there are 3 types of stock Discovery stock... with the most liquid one having no voting right. :( Gawd I hate that sort of tomfoolery.
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Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Submitted October 05, 2017 at 10:16AM by shane_stockflare http://ift.tt/2fNb2qV
