Wall Street was already skeptical about the rationale for either Discovery Communications Inc. (DISCA) or Viacom Inc. (VIAB) buying Scripps Networks Interactive Inc. (SNI) . An all-cash deal by the already heavily indebted Viacom is likely to spark an uproar.
Viacom shares were falling early on Wednesday, July 26, after Reuters reported that Viacom is preparing to make an all-cash offer for Scripps Networks, owner of the Food Network, DIY Network and HGTV. The deal likely would cause Viacom's debt to spike just as new CEO Bob Bakish has declared lowering the company's arrears a chief focus. Viacom did not immediately return a request for comment.
Since becoming permanent CEO in December, Bakish also has insisted that the owner of Nickelodeon, MTV and Paramount Pictures would focus on six core cable networks given that pay-TV operators are increasingly offering consumers packages with fewer networks at lower price points in an effort to staunch the decline in cable and satellite TV subscriptions.
Bakish also has said Paramount Pictures would seek to use the fictional characters and personalities popular at its top networks for its own productions. It's difficult to see how the Food Network, HGTV or Travel Channel would provide subjects for Paramount films.
Buying Scripps also would increase the exposure to advertising as a proportion of overall revenue at both Viacom and Discovery, a deepening concern considering that marketers are increasingly moving money to digital platforms.
Viacom shares Wednesday morning were down 1.9% to $34.34 while Scripps stock was up 2.2% to $83.24. Discovery shares had added 0.8% to $26.14.
Wall Street analysts this week have questioned whether Viacom or Discovery would have more leverage negotiating fees with cable TV providers if they owned Scripps' networks. As pay-TV operators move increasingly to packages offering fewer channels, it's becoming increasingly difficult to make the cut into skinny bundles. Alphabet Inc.'s (GOOGL) YouTube TV doesn't carry channels from any of the three companies, for example.
Commenting on Discovery's interest in Scripps Networks, Bernstein Research media analyst Todd Juenger wrote this week that it would "end up with increased vulnerability to the negative structural forces impacting cable TV networks."
In other words, owning more networks may not be better. Time Warner Inc. (TWX) rejected Twenty-First Century Fox Inc.'s (FOXA) advances in 2015, preferring to agree to merge with a distribution company, AT&T Inc. (T) . That deal is under review at the Department of Justice's antitrust division.
Most importantly, paying all cash for Scripps would significantly add to Viacom's debt load, which stood at $12.19 billion at the end of March, Securities and Exchange Commission filings show. Moody's Investors Service Inc. downgraded Viacom's debt ratings in September, citing weaker operating performance and leverage of 4 times adjusted earnings, a level that exceeded the company's own goal of 3 times.
Viacom did secure some debt relief after agreeing in April to sell its 49.76% stake in the Epix premium cable network to MGM Holdings Inc., owner of Metro-Goldwyn-Mayer studios, for $597 million. Moody's projected in April that the Epix deal could lower Viacom's leverage to 4.5 times from 4.7 times for the 12 months ended Dec. 31, 2016. The ratings agency has a Baa3 rating on Viacom.
Former CEO Philippe Dauman's years of buying back Viacom's own stock while shares moved lower and lower is largely to blame for the debt predicament. Bakish has said that the company would remain focused on deleveraging.