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In a Bidding War for Content, Could Discovery be Attractive?

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Deal Frenzy in Entertainment


A lot of attention has been paid of late to the battle developing between the Walt Disney Corporation (DIS - Free Report) and cable giant Comcast Corporation (CMCSA - Free Report) .  Disney has made an all-stock bid of approximately $52B for a significant portion of the assets of 21st Century Fox (FOXA - Free Report) and is currently working on obtaining regulatory and shareholder approval.


Though there has been no official announcement yet, the word on the street is that Comcast is scrambling to arrange financing for an all cash bid of $60B.  In the event of competing bids, the decision would fall to Fox Shareholders.  Rupert Murdoch owns 17% of those shares and has expressed a preference for the Disney deal, even though it carries a lower nominal price.


It’s also anticipated that in the event of a bidding war, Comcast could sweeten the pot by combining it with the purchase of U.K. TV provider SKY, which would likely push the value of the deal toward $100B.


Last year, Disney announced its intention to pull its content from Netflix (NLFX) in order to start its own streaming video service as a Netflix competitor.  


Hunger for Content


The most important commodity for streaming video providers is content.  They can choose to purchase finished productions, engage in licensing deals with the owners of content or produce their own original movies and shows.  Netflix engages in a combination of all three.  It’s easy to see how the 21st Century Fox acquisition would aid Disney in its aspirations to compete in the streaming market.


Discovery Communications (DISCA - Free Report) just put up a great quarter and looks poised to continue the growth with its recent acquisition of Scripps Network Interactive, adding to its production of over 8000 hours per year of original programming. Discovery expects the Scripps deal to add to its demographic reach and international appeal, both of which increase the value of its offerings to advertisers.


Discovery’s $2.86B in revenues in the quarter topped Q1 2017 results by 64%, and net earnings of $0.53/share easily beat the Zacks Consensus Estimate of $0.45/share.  Four recent analyst upward revisions now have expected 2018 earnings at $2.77/share, up from $2.48/share 60 days ago.  Thanks to the upward revisions, Discovery is a Zacks Rank #1 (Strong Buy).


Discovery currently trades at a P/E Ratio of 8.2X, considerably lower than the Broadcasting/Radio-TV sub-industry average of 29X.


Speculating on future takeovers is a dicey business because the world and business conditions change quickly, but in an era of consolidation in the entertainment business, it’s easy to see how Discovery’s earnings potential, vast content library and extremely low valuation would be attractive to either a huge entertainment company starting its own streaming service or a Cable TV conglomerate that’s continually adding to its portfolio.

 

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