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Reports that Scripps Networks Interactive could merge with Discovery Communications show that mid-market TV providers face heightened online competition that is reshaping media, industry analysts told Bloomberg BNA.
Discovery is offering $90 a share for Scripps, according to Bloomberg News, edging out Viacom Inc., which was the other potential suitor.
A deal between Scripps and Discovery would be a marriage of direct competitors that normally would raise red flags for regulators. But the companies may be able to convince antitrust enforcers that the merger is needed to maintain competition in an evolving marketplace that increasingly combines pay-TV content with internet providers, analysts said.
All three firms face a market that has seen consolidation and is poised for another wave of mergers, Ropes & Gray LLP partner Paul Scrivano told Bloomberg BNA.
“The landscape here is in flux,” said Scrivano, who is the global head of his firm’s mergers and acquisitions practice. The leverage that the parties would get from a merger isn’t to raise prices to consumers, but “to get a fair shake dealing with much larger players — meaning the cable operators.”
As such, although the merger would be large and take place between two horizontal competitors, the parties could make a case to antitrust regulators that they should be allowed to close their deal. “They have a good shot at describing to the agencies how it is pro-competitive,” Scrivano said.
The past few years have seen several big mergers in media as well as wholesale shifts in how people consume content that may call for new approaches among traditional providers.
Amazon.com Inc. has expanded its streaming service Prime. Alphabet Inc. started YouTube TV. Sony Corp. started selling TV and video through its Playstation gaming console. Netflix Inc. and Hulu LLC began creating their own premium content, rather than simply aggregating it.
Recent “vertical” mergers, such as the proposed merger of AT&T Inc. and Time Warner Inc., and Verizon Communications Inc.'s purchase of Yahoo! Inc., meld content with distribution in a way that threatens to disrupt the market further. And cable operators merged down to a few behemoths when Charter Communications Inc. swallowed Time Warner Cable and Bright House Networks in May 2016 to become the nation’s second largest cable provider behind market giant Comcast Corp.
A deal between Discovery and Scripps would create a $12 billion cable network with improved scale for selling subscriptions online as well as greater leverage to negotiate with big cable and satellite operators, Paul Verna, a senior analyst with research firm eMarketer, told Bloomberg BNA. The two companies are now at a disadvantage in negotiating with the big online and cable providers. “They aren’t thinking about throwing their weight around. They are thinking about how to make their content work digitally,” he said.
Given recent distributor-content pairings like AT&T and Time Warner, Verna said digital providers could lean toward favoring their own content. Combining forces at the content level, as Scripps may be looking to do, makes it harder to ignore the bundle the combined company represents.
“The key is owning desirable content, and how you monetize it is almost secondary,” Verna said.
The express purpose of any deal Discovery might make with Scripps would be to improve bargaining leverage. Scrivano said antitrust regulators shouldn’t have a problem with that. “Content providers have realized that they need to get bigger to effectively compete and provide their content to viewers.”
Scrivano said Scripps and Discovery are complementary networks in programming, which means they don’t overlap enough to destroy competition. What’s more, the programming market also contains other competitors that provide similar content, and none of them are “outsized.”
Regulators would likely still be careful in looking at any type of Scripps deal. “Sometimes size alone will cause a deal to receive scrutiny,” Scrivano said. The parties would probably face several months of antitrust review if they reach an agreement because they are in a complex market.
In addition to antitrust enforcers, the Federal Communications Commission also might need to review a Scripps-Discovery merger if the sale involves a transfer of broadcast licenses. The FCC’s standard of review gauges whether the tie-up is in the public interest, a broader and less defined scope than its effect on competition. The companies would need to explain to the FCC how their increased leverage would lower prices and increase access for consumers.
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