By Joe Flint
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 26, 2017).
Since taking over as Viacom Inc.'s chief executive last year
with the blessing of powerful shareholder Shari Redstone, Bob
Bakish has been working to win over Wall Street with moves meant to
stabilize the embattled entertainment giant.
Now Mr. Bakish is contemplating what would be his boldest bet
yet: an acquisition of rival media outfit Scripps Networks
Interactive, operator of HGTV and Food Network. People familiar
with the situation say Viacom is in talks to acquire the company,
as is Discovery Communications Inc.
Members of the Scripps family were expected to meet Tuesday to
discuss a potential sale, according to people familiar with the
matter. The family members collectively control a 91.8% voting
stake in the company and are expected to make a decision soon.
In a sign that investors are optimistic about the odds of a
deal, Scripps shares have risen by about 20% since The Wall Street
Journal first reported last week that the company was in play.
At Viacom, Mr. Bakish has sharpened the company's focus on six
key cable channels, including MTV and Nickelodeon, brought in new
management at the Paramount film studio, given the green light to
spend more on talent, and unloaded the company's stake in
pay-television channel Epix for about $600 million.
At first glance, Viacom and Scripps would be odd partners. The
Scripps channels are lifestyle brands primarily aimed at families
or people looking to upgrade their homes and kitchens. Viacom's
core brands target teens and young adults, often with reality
shows.
However, such a deal could potentially strengthen Viacom's hand
in channel-carriage negotiations with cable companies and emerging
streaming TV players.
The Scripps networks have been solid performers. In the second
quarter, domestic ad revenue for Scripps was up 4% while Viacom's
was off by 2%, according to MoffettNathanson, a media analyst firm.
Subscriber fees grew by 6% in the second quarter for Scripps,
compared with 1.9% for Viacom, MoffettNathanson said.
Together, the companies would account for about 18% of TV
ratings, on par with conglomerates like Walt Disney Co. and
Comcast's NBCUniversal, according to RBC Capital Markets.
For Viacom, the question is how financially feasible such a
takeover would be. Scripps had an $8.8 billion market
capitalization before the Journal reported on July 18 that the
company was in talks with Discovery. Reuters later reported that
Viacom had talks with Scripps. The company is now valued at $10.4
billion.
Viacom had $12.2 billion in debt as of March 31 and is clinging
to the lowest level of investment-grade credit ratings, according
to Moody's Investors Service. That means a deal would likely need
to be financed substantially with stock, rather than cash, so as
not to further burden the balance sheet, said Moody's debt analyst
Neil Begley.
"I don't think that they have a lot of financial capacity on
their balance sheet," Mr. Begley said.
But Viacom's equity isn't as valuable as it once was. The shares
trade at about 12 times earnings, compared with Scripps at about 18
times. Viacom has a market capitalization of $14.5 billion.
One benefit would be that Viacom could boost revenue by helping
Scripps' channels gain greater distribution globally, Mr. Begley
said.
The additional free cash flow from Scripps could also be used to
help Viacom reduce its leverage, Barclays equity analyst Kannan
Venkateshwar wrote in a note last week, adding that a deal would
still be "a confusing step in the wrong direction."
For Discovery, an acquisition of Scripps could help the company
offer a compelling package of popular, nonfiction channels for
"skinny" online TV bundles, and a good mix of male and
female-skewing audiences, among other benefits.
Investors have been on a roller coaster with Viacom lately. When
Mr. Bakish was installed as permanent CEO in December, following a
power struggle that led to the overhaul of management and the
board, shares began to rebound from the mid-$30 range and reached
about $47 in late March.
But persistent Wall Street concerns about the TV ad market and
Viacom's place in the cable TV bundle have helped push the stock
down to $35, slightly above where they were when Mr. Bakish took
over. Over three years, Viacom's class B shares are down more than
50%.
Mr. Bakish is still dealing with baggage he inherited, including
a weak slate of movies at Paramount and several cable channels
enduring rating declines.
He landed the job of chief executive after winning the
confidence of Ms. Redstone, president of Viacom's controlling
shareholder National Amusements Inc. and daughter of ailing mogul
Sumner Redstone.
Mr. Bakish hasn't been as tightfisted with the creative
community as the company was perceived to be under the previous
regime. In June, Paramount tapped Brian Robbins, a successful
producer of content targeting teens and young adults to head the
new production division Paramount Players.
In another big deal, Viacom struck a partnership with successful
movie and television producer Tyler Perry to produce content for
BET and other networks as well as getting a first look at any new
feature concepts.
Sarah Rabil and Dana Cimilluca contributed to this article
Write to Joe Flint at joe.flint@wsj.com
(END) Dow Jones Newswires
July 26, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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