Broadband Cable Association of Pennsylvania

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December 12, 2013

In recent years, Food Network majority owner Scripps Networks Interactive Inc. has discovered the downside of being a small fish in an increasingly big and dangerous pond. The niche lifestyle-cable-channel owner, which has held informal talks with Discovery Communications Inc. about a possible sale, according to people familiar with the matter, has notched slower growth in recent years while its flagship Food Network has struggled with ratings declines. At the same time, Scripps hasn't kept up with its peers in wresting affiliate fees from cable- and satellite-TV providers or in expanding into faster-growing overseas markets as the U.S. pay-TV market matures, analysts say.

The company's third-quarter financial results highlighted its challenges. Despite boosting earnings, the company reported lower revenue than Wall Street analysts expected and its first drop in digital-advertising revenue in years. Scripps's stock has fallen nearly 10% over the past few weeks, though it rallied strongly Wednesday after Variety.com reported Discovery's interest in a takeover. Scripps's performance, combined with the end of the Scripps family trust, has left the company, perennially cited as a potential takeover target, especially vulnerable to a bid, investors and analysts say. Its woes reflect a broader slowdown in the U.S. television industry, which faces growing competition from online-video services. Growth in the number of households signing up for pay TV has stalled. And ratings for many of the largest cable networks have declined this season. Executives from Discovery and Time Warner Inc. acknowledged the recent weakness in ratings at some of their networks at this week's UBS media conference.

Scripps has faced the same troubles at its networks. As of mid-November, all three of its biggest channels-Food Network, HGTV and Travel Channel-had lost prime-time viewers this season in their target 25- to 54-year-old demographic, according to the most recent analysis of Nielsen ratings by UBS. Meanwhile, the company's operating-income growth has slowed in the past two years to 5.13% so far this year from 4.4% in 2012, more than 15% in 2011 and nearly 38% in 2010. The trend is likely to continue. S&P Capital IQ predicts that Scripps's earnings-per-share growth over the next two years will shrink 4.6%, while peers like AMC Networks, CBS Corp. , Discovery, Walt Disney Co. , Viacom Inc. and Time Warner will enjoy double-digit growth. A Scripps spokesman declined to comment.

The slowdown in the U.S. has prompted several big entertainment companies, including Discovery, to look overseas for growth. But while Scripps has recently emphasized international expansion with its purchase of the Asian Food Channel and Travel Channel International, markets outside the U.S. remain a small part of its business, accounting for just 3% of revenue in the third quarter. "If there's any knock against Scripps, it's that international is a relatively small portion of their revenues," said Tuna Amobi, an analyst at S&P Capital IQ.

Scripps Chief Executive Ken Lowe conceded as much at the UBS conference this week. "In some cases, we were 15, 20 years behind some of the other companies that were already out there internationally, who have done a very good job," he said. But he also noted that not all Scripps's brands would travel well, particularly the home-and- garden-focused HGTV. "If you ask people about a two by four [lumber] in certain countries, they don't quite understand what you're talking about," he said. "So that has some limitations."

For some analysts, Scripps's lack of international exposure was one of the main arguments against Discovery buying it. "The problem with Discovery, or anyone, buying Scripps is... you have to pay a relatively high price for a purely domestic asset," wrote Bernstein Research analyst Todd Juenger. "An asset which, especially for Discovery, would slow down growth, in our opinion." Some analysts say, however, that the prospects of consolidation among cable operators argue in favor of a deal. Mergers among distributors would give them more leverage in negotiating with channel owners on programming fees. Charter Communications Inc., Cox Communications Inc. and Comcast Corp. are each eyeing Time Warner Cable Inc., the Wall Street Journal has reported. "The more likely it becomes that Time Warner Cable is sold to any other distributor, the more imperative it becomes that the content companies consolidate in order to maintain negotiating leverage against a larger cable company," said Laura Martin, an analyst at Needham & Co.

Scripps, in particular, could use more leverage in this department, she argued. As the majority owner of Food Network and the owner of HGTV, Travel Channel and several other lifestyle channels, it hasn't been able to negotiate the kind of affiliate fees from pay-TV providers that its peers with similar audiences have been able to get. "Only 30% of Scripps Networks revenue comes from affiliate fees," Ms. Martin said. "In larger content conglomerates, affiliate fees are 50% of revenue. That's the upside that Discovery" or another buyer would capture. Wall Street Journal

Ziggo NV said Thursday it is in talks with U.S. cable company Liberty Global Inc. about a potential takeover that could value the Dutch cable and telephone provider at more than 6 billion Euros($8.3 billion). In October, Ziggo announced it had rejected a bid from Liberty Global, which already owns a 28.5% stake in the Dutch company, for the shares it doesn't already own. Liberty Global is the international cable business of media mogul John Malone. "Ziggo notes the recent market speculation and announces...that it is currently in discussions with Liberty Global regarding a potential offer for the company by Liberty Global," Ziggo said, adding there was no certainty the talks with ultimately lead to an agreement. Ziggo didn't say how much Liberty might pay for the company, which had a market capitalization of about 6.6 billion Euros ($9.1 billion) in morning trade Thursday. A spokesman for Englewood, Colo.-based Liberty Global declined to comment.

The talks come as Europe's fragmented telecom industry is expected to undergo a wave of consolidation triggered by structural challenges and a weak economy. Liberty Global has been an active deal maker this year, acquiring U.K. cable-television and Internet provider Virgin Media for $16 billion and raising its stake in Belgium's Telenet Group Holding NV. In June, Liberty moved to acquire Germany's biggest cable operator, Kabel Deutschland Holding AG, but was outbid by rival Vodafone Group PLC in a roughly $10.6 billion deal. Liberty already was a major operator in the country, having bought Germany's second-largest cable company, UnityMedia, in 2009, and Kabel Baden-Wuerttenberg, another cable provider, in 2011.

The European telecom industry has also seen major recent activity elsewhere. Vodafone, prioritizing its European business, sold its 45% stake in mobile-network operator Verizon Wireless to U.S. telecom giant Verizon Communications Inc. in a landmark $130 billion transaction. Liberty Global already owns a Dutch cable business called UPC, and combining it with Ziggo would create a stronger domestic rival for Dutch incumbent telecommunications firm Royal KPN NV. Analysts said the likelihood of Liberty reaching agreement with Ziggo is high, with pricing strategy seen in previous deals signaling a positive outcome. "The confirmation of renewed talks between the two suggests a deal is close, and we expect one to be reached," said Bernstein analyst Robin Bienenstock. "If the Virgin Media/Liberty Global proxy filing from the start of this year tells us anything, it is that being stubborn and insisting Liberty pay a high price works as a tactic."

Mr. Bienenstock said the deal makes sense for both the companies and the sector. "Cable consolidation would, in our view, hasten wireless consolidation and be good for the entire market," he said. Ziggo was listed on the Amsterdam stock exchange in 2012 by its then-owners, private-equity firms Cinven Ltd. and Warburg Pincus LLC. It serves around three million households and has 1.8 million broadband clients, 2.2 million digital-television customers and 1.4 million telephone subscribers, according to its website. Ziggo reported net profit of 193 million Euros in 2012 on sales of 1.54 billion Euros. Wall Street Journal

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