Discovery Communications Q2 Profit Down; To Buy Scripps Networks For $14.6 Bln

(RTTNews) - Discovery Communications Inc. (DISCA, DISCB, DISCK) reported a profit for the second-quarter that decreased 8% from last year, as improved operating results and lower restructuring charges were more than offset by currency-related transactional losses vs. gains in the prior year and increased losses from equity investees.

Separately, Discovery Communications said it agreed to acquire Scripps Networks Interactive Inc. (SNI) in a cash-and-stock transaction valued at $14.6 billion or $90 per share, based on Discovery's Friday, July 21 closing price. The purchase price represents a premium of 34% to Scripps' unaffected share price as of July 18, 2017. The transaction is expected to close by early 2018.

In addition, Scripps Networks Interactive reported that its Consolidated income from operations before income taxes in the second quarter 2017 was $400.8 million, an increase of 20.8% compared with the prior year period. The increase was primarily driven by an increase in foreign currency transaction gains and a decrease in interest expense compared with the prior year quarter, along with a loss on the sale of investments in the second quarter of 2016.

Discovery Communications noted that the combined company will produce approximately 8,000 hours of original programming annually, be home to approximately 300,000 hours of library content, and will generate a combined 7 billion short-form video streams monthly, demonstrating its commitment to delivering content as a top short-form provider.

The combination is expected to create significant cost synergies, estimated at approximately $350 million. The deal is expected to be accretive to Adjusted Earnings per Share and to Free Cash Flow in the first year after close.

Scripps shareholders will receive $90 per share under the terms of the agreement, comprised of $63.00 per share in cash and $27.00 per share in Class C Common shares of Discovery stock, based on Discovery's Friday, July 21 closing price.

The stock portion will be subject to a collar based on the volume weighted average price of Discovery Class C Common Shares over the 15 trading days ending on the third trading day prior to closing.

Scripps shareholders will receive 1.2096 Discovery Class C Common shares if the Average Discovery Price is below $22.32, and 0.9408 Discovery Class C Common shares if the Average Discovery Price is above $28.70.

If the Average Discovery Price is greater than or equal to $22.32 but less than or equal to $28.70, Scripps shareholders will receive a number of shares between 1.2096 and 0.9408 equal to $27.00 in value. If the Average Discovery Price is between $22.32 and $25.51, Discovery has the option to pay additional cash instead of issuing more shares.

Scripps shareholders will have the option to elect to receive their consideration in cash, stock or the mixture, subject to pro rata cut backs to the extent cash or stock is oversubscribed.

The purchase price implies a total transaction value of $14.6 billion, including the assumption of Scripps' net debt of approximately $2.7 billion. Post-closing, Scripps' shareholders will own approximately 20% of Discovery's fully diluted common shares and Discovery's shareholders will own approximately 80%. This calculation is based on the number of Discovery shares outstanding today.

Kenneth Lowe, Chairman, President & CEO of Scripps Networks Interactive. is expected to join Discovery's board of directors following the close of the transaction.

The transaction is subject to approval by Discovery and Scripps' shareholders, regulatory approvals, and other customary closing conditions.

Discovery Communications reported that its Second quarter net income available to the company decreased 8% to $374 million, as improved operating results and lower restructuring charges were more than offset by currency-related transactional losses vs. gains in the prior year and increased losses from equity investees. Earnings per share decreased 3% to $0.64 due to lower DCI Net Income, partially offset by fewer shares outstanding. 

Adjusted Earnings Per Share, which excludes the impact of amortization of acquisition-related intangible assets, decreased 4% to $0.68 for the second quarter 2017. Second quarter Adjusted EPS excluding currency effects increased 9%. Analysts polled by Thomson Reuters expected the company to report earnings of $0.72 per share for the second-quarter. Analysts' estimates typically exclude special items.

Discovery Communications's Second quarter revenues were $1.745 billion up 2% from the prior year, as 2% growth at U.S. Networks and 3% growth at International Networks were partially offset by a 4% decline at Education and Other. Analysts expected revenue of $1.76 billion for the quarter.

Discovery said it will provide forward-looking guidance in connection with this quarterly earnings announcement on its quarterly earnings conference call and webcast referenced hereafter.

Meanwhile, Scripps Networks Interactive reported that Consolidated adjusted segment profit was $412.8 million, a decrease of 1.6%, compared with the prior year quarter. The decrease was primarily due to the expected increase in programming and selling, general and administrative costs compared with the prior year period. These expenditures were partially offset by the growth in operating revenues in the quarter.

Scripps Networks's Consolidated operating revenues for the second quarter of 2017 were $925.0 million, an increase of 3.6% over the prior year period. Advertising revenues were $663.0 million, an increase of 2.5%, and distribution revenues were $239.7 million, an increase of 7.3% over the prior year period.

Scripps Networks now expects 2017 revenue growth to be approximately 4%, down from the previously issued growth of approximately 6%. Additionally, as a result of anticipated revenue growth, offset by increased programming, selling, general and administrative expenses, it now expect segment profit to be approximately flat for the year, down from the previously issued growth of approximately 3%. All our other guidance remains unchanged.