Discovery Eyes Global HGTV Expansion as Scripps Deal Closes

(Bloomberg) -- Discovery Communications Inc. is planning an aggressive global expansion after closing its $11.9 billion acquisition of Scripps Networks Interactive Inc. on Tuesday.

While Discovery already airs its own shows around the world, the global push will focus on Scripps content like HGTV fixer-upper programs “Property Brothers” and “Flip or Flop.”

“They have a massive library of nonfiction content and most of it hasn’t been seen around the world,” Discovery Chief Executive Officer David Zaslav said in an interview.

As the U.S. pay-TV industry continues to decline, more media companies are looking overseas for new areas of growth. In the latest example, Comcast Corp., Walt Disney Co. and 21st Century Fox Inc. are engaged in a potential bidding war over the pay-TV provider Sky Plc, hoping to gain a larger foothold in the European market.

Discovery, one of billionaire John Malone’s key holdings, already has a large international business. Its content can be seen in more than 200 countries and it gets about about half its revenue from outside the U.S.

Discovery, which owns Animal Planet, TLC and the Discovery Channel, specializes in nonfiction content like “Shark Week,” which appeals to fans regardless of language. Scripps owns the Food Network and Travel Channel, though HGTV is the company’s crown jewel.

Discovery will translate Scripps’s content into 40 different languages and “start to move it around the world and see what works and what doesn’t,” Zaslav said.

As Discovery takes Scripps overseas, its U.S. business has been mixed. While Discovery reported an increase in U.S. advertising revenue last quarter, its cable channels continue to lose subscribers as more people drop their pay-TV packages. Discovery’s shares have fallen 12 percent over the past year as investors fret over the U.S. media industry.

Scripps’s channels have also not been immune to the decline in TV viewership. At the end of 2016, HGTV was the third-most-watched network behind ESPN and Fox News and ahead of CNN. But HGTV’s viewership is down 6 percent since late September, and it’s now the seventh-most-watched cable channel, behind other entertainment networks like USA and TBS.

Doug Creutz, an analyst at Cowen and Co., said last week he was “not sold on the strategic rationale” for Discovery buying Scripps because the combined company will be even more dependent on the U.S. cable business. Discovery now owns 18 cable channels at a time when consumers are gravitating toward cheaper online TV services with fewer channels.

Over time, Zaslav said Discovery could narrow its portfolio to 12 channels. With Scripps under the same corporate roof, Discovery could launch its own Netflix-like subscription video service with only Discovery and Scripps content, he said.

The cost savings from owning Scripps will boost Discovery’s cash flow, allowing it to buy other companies, pay down debt and have a cushion for uncertain times in the TV industry, Zaslav said. Discovery estimates it will save at least $350 million from synergies within two years.

With Netflix, Amazon, Hulu and others spending billions on high-cost original shows, becoming more dominant in low-cost unscripted programming is a smart bet, Zaslav said.

He compares scripted TV dramas to the “soccer ball at your kids’ soccer game,” Zaslav said. “Everybody has gone to that ball. We have the majority of the rest of the field, and it feels like we have a great hand.”

To contact the reporter on this story: Gerry Smith in New York at gsmith233@bloomberg.net.

To contact the editors responsible for this story: Crayton Harrison at tharrison5@bloomberg.net, Jessica Brice, Rob Golum

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