Discovery is buying Scripps Networks Interactive for $14.6 billion

Drew Angerer, Getty images

(Reuters) - Discovery Communications Inc is acquiring Scripps Networks Interactive for $14.6 billion in a deal that is expected to boost the combined company's negotiating leverage with pay TV operators at a time when more people watch video online, the companies said on Monday.

The acquisition, which was completed last night, brings together Scripps' largely female audience of lifestyle channels such as HGTV, Travel Channel and Food Network with Discovery's Animal Planet and Discovery Channel, which primarily has male viewers.

With the acquisition, Discovery can cut costs and use Scripps's shows to further its international reach. The combined company's larger programming slate might also provide leverage in negotiations for inclusion in skinny bundles, or economy-priced cable packages that offer fewer channels than a standard contract.

The combined company will have 20 percent total cable viewership, according to a recent Barclays note. That will strengthen its negotiating stance when renewing contracts with distributors. By adding Scripps programming, Discovery could also launch its own "skinny bundle" of networks at a low cost.

U.S television networks and cable providers are under pressure as more viewers watch their favorite shows and movies on phones and tablets. There is also increased competition for viewers from streaming services such as Netflix Inc and Amazon.com Inc.

Scripps has been considered a takeover target since the Scripps family trust that controlled the company was dissolved five years ago.

This marks at least the third time that Discovery, whose shareholders include cable magnate John Malone, has tried to buy Scripps. Discovery outbid Viacom Inc for Scripps, which Reuters first reported Wednesday.

Investors are largely positive on the deal for the synergies the combined company will see and the leverage it will have with pay TV partners. Since news of Discovery's talks started, Discovery is up almost 3 percent, while Scripps is up almost 30 percent.

But many analysts question how the combined company will compete long-term as viewers keep cutting cords to cable providers and advertising and ratings decline.

"If there were no secular concern, this deal would be a slam dunk," wrote Barton Crockett an analyst at FBR Capital Markets, on July 27. While ratings for both companies have been solid, "investors don't trust that this can continue, and we're not sure what turns that fear around."

Discovery is paying 70 percent cash and 30 percent stock for Scripps. (Editing by David Gregorio)

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