Discovery/SNI Seen Likely Cruising Through Regulatory Review

Discovery Communications’ planned $14.6 billion takeover of Scripps Networks Interactive is largely expected to sail through regulatory reviews, experts told us. The deal might not need FCC review since SNI broadcast licenses could just be turned in and Discovery potentially could use its existing arrangement to transmit Scripps programming to MVPDs the way it does its own, said a communications lawyer with cable and content clients. Even if one or two need to be transferred, that often is done with a simple licensing application that doesn’t require the FCC open a docket, the lawyer said. Discovery said it didn't anticipate antitrust problems with its SNI bid but didn't comment on FCC review. Meanwhile, The Wall Street Journal reported SoftBank CEO Masayoshi Son was considering making a bid for Charter, to merge it with SoftBank subsidiary Sprint.

One possible regulatory speed bump for Discovery/SNI comes via the Liberty companies and their chairman, John Malone, with Liberty's stakes in Charter Communications and Malone’s stakes in Discovery raising the specter of Charter getting New Discovery content exclusively or under more favorable terms, said MCTV President Robert Gessner. He said Discovery/SNI could become part of a broader wave of consolidation among mid-sized networks, all of them likely leading to higher prices for content and increased forced distribution.

FCC approval likely wouldn't be too challenging, obviating any need to turn in any Scripps licenses, said a lawyer with programmer and distributor clients. A deal like AT&T/Time Warner raises vertical integration questions, but Discovery/Scripps is horizontal, and it's hard to see the combined entity having significant enough market power that it raises red flags -- though the docket likely would be a vehicle for small MVPDs and others to argue about media consolidation and rising content prices, the lawyer said. It wouldn't be surprising if Discovery/SNI became part of a larger programmer consolidation trend since a lot of companies are looking at transactions given the favorable White House administration and the evolving video market landscape, the lawyer said.

Even if there were a transfer of licenses, opposing that becomes difficult because program access rules that currently apply to Discovery due to Malone's ownership interests and that prevent discriminating against an MVPD in the sale or delivery of programming also would apply to SNI programming, a cable lawyer said. The lawyer also said there's no obvious need for the deal to try to avoid FCC scrutiny since it's unlikely to face anywhere near the kind of opposition that MVPD consolidation brings up.

The transaction will accelerate Discovery’s pivot from a linear TV company to a content company operating across multiple platforms, CEO David Zaslav said in an analyst call, saying it will help extend Scripps brand and content internationally. The two companies will produce 8,000 hours of original programming annually and 7 billion short-form video streams monthly, he said. SNI CEO Ken Lowe said each company has been focusing on the over-the-top and direct-to-consumer markets, and combined will do more in short-form video and endemic advertising. The two companies said New Discovery would have close to 20 percent of ad-supported pay-TV viewership in the U.S.

The deal needs approvals by SNI and Discovery shareholders, as well as regulatory OKs, including from the EU, the companies said. FCC approval wasn't mentioned in SEC filings (see here and here) Monday.

Tough Business

The deal, partnered with Discovery and SNI Q2 results announced Monday, including SNI lowering its full-year guidance, “suggests how tough the cable net business has become,” Wells Fargo analyst Marci Ryvicker said in a note to investors.

Discovery/SNI “is a clear sign the cable network industry has seen the future [of] deep cost cutting and increased scale,” MoffettNathanson analyst Michael Nathanson said in a note. He said the deal will generate some savings and international revenue opportunities and give greater scale, but those won’t change the companies' long-term prospects, given the ratings and subscriber trends. Discovery has too many networks to protect, Nathanson wrote.

Any sustainably higher profitability at Discovery/SNI would come from better affiliate pricing power with distributors, economies of scale in advertising and better opportunities to launch direct-to-consumer products, but affiliate pricing power might not grow with more networks, Credit Suisse's Omar Sheikh wrote investors. The Discovery Engage targeted ad platform would benefit from SNI's ad inventory, he said.

The takeover “reflects the growing value of niche and targeted programming,” said Adonis Hoffman, chairman of the for-profit Business in the Public Interest, not representing any party to the deal. Given the fragmentation of the media environment, the transaction doubles down on premium content, making a "must-buy" destination for advertisers and "must-go" destination for women's and family entertainment, he said. He also said it's unlikely the FCC would raise any public interest concerns. The deal, by giving Discovery more leverage in programming negotiations with MVPDs, “extends their shelf life on pay-TV lineups,” American Cable Association Ross Lieberman tweeted.

Sprint/Charter?

The conventional wisdom meantime remains that a deal between Sprint and a cable operator like Charter would have an easier time with federal regulators than the long-expected Sprint and T-Mobile combination (see 1706270075). Charter apparently took itself out of contention, at least as a buyer of the U.S.’ fourth-largest wireless carrier. Sprint reports earnings Tuesday and executives will answer questions from analysts.

“We understand why a deal is attractive for Softbank, but Charter has no interest in acquiring Sprint,” Charter said in a statement. “We have a very good MVNO [mobile virtual network operator] relationship with Verizon and intend to launch wireless services to cable customers next year.”

A Sprint/Charter agreement would have few problems if regulators look at wireless and fixed broadband as separate markets, said Roger Entner, analyst at Recon Analytics. “If the DOJ and FCC look at it as a combined market since the technologies are increasingly becoming comparable, then the situation becomes a lot more complicated.” In that case, regulators likely would require a detailed market-by-market analysis in the Charter markets, Entner said.

Wells Fargo analyst Jennifer Fritzsche said in a Monday email to investors the Tuesday call is likely to be focused on M&A activity. "Many view this recent news of Softbank possibly going after Charter … as a move of some sort of desperation/running out of options beyond” T-Mobile, Fritzsche wrote.

“Cable is missing a bet if it doesn’t prepare for 5G by shoring up its infrastructure with the kinds of assets Sprint has,” said network architect Richard Bennett. “These assets are somewhat attractive to T-Mobile, but there are all sorts of other issues in combining Sprint with another mobile carrier.” One big question is whether T-Mobile would want a combination with Sprint “the weak sister in the wireless industry,” Bennett said.

“The management teams of Comcast and Charter were both quite clear on their earnings calls last week that they had little interest in owning wireless,” noted BTIG analyst Walter Piecyk. “Charter has now also made it clear that accepting Sprint's stock as a component of a sale of Charter is also unpalatable.”