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Why It Makes Sense for Disney to Buy Scripps Networks

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Scripps could help Disney make up for a key demographic shortfall.

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MINYANVILLE ORIGINAL Should Disney (DIS) acquire Scripps Networks Interactive (SNI)? Yes, says Citigroup analyst Jason Bazinet in a research note released Monday.

Bazinet highlights the fact that Disney has a vast array of offerings that reach many demographics -- except women, which is where Scripps' strength lies.

Disney has Disney Junior, which makes media for toddlers. Movies from the animation studio Pixar are four-quadrant hits, while Marvel, the comics giant, which the Mickey Mouse company acquired for $4 billion in 2009, is geared toward teenage boys. And Disney-owned ESPN is, of course, a big hit for men.

Through ABC and shows like Dancing With the Stars, Grey's Anatomy ,and Desperate Housewives, the Mouse is able to draw in women, especially older women above 49. However, Bazinet notes that Housewives has ended its run. Scripps, with its hit cable channels Food Network, HGTV, Travel, and DIY, could bring in female viewers with higher margins. Programs on broadcast networks "simply don't ring up the same sort of profits as lesser known shows on cable TV," he says.

The purchase of Scripps, whose channels draw about 1.7 million daily viewers, would grow Disney's cable audience by 50% and importantly, also allow it to decrease its reliance on ESPN. The sports network is a big income generator for Disney because pay TV companies cough up top dollar to carry it, but Bazinet says this revenue model is unsustainable. With the economy stagnant, "it's not clear how many years – or decades – this can last," he says.

Indeed, the recent stand-off between DirectTV (DTV) and content provider Viacom (VIA) shows that pay TV operators are increasingly more resistant to paying high fees to carry content, as they do not want to pass on the costs to customers battered by the weak economy. The cost of purchasing sports content has also soared in recent years, as evidenced by the $1.18 billion NBC (CMCSA) had to pay to broadcast the recently concluded 2012 London Olympics.

Bazinet calculates that Scripps could sell for 12x to 15x its 2011 earnings before interest and taxes at $10.3 billion, or $67.07 per share, which is higher than the stock's current trading price of about $60.

At an acquisition price of around $10.3 billion, Disney could use its stock to buy Scripps, in which case it would have to dilute earnings per share by $0.07 to $0.13, but Disney could compensate by repurchasing stock. Thus, "Disney's stock would only pull back $1-$2 on such a transaction," Bazinet says.

Scripps, based in Knoxville, soared to a 52-week high on Monday, hitting $61.17. After Bazinet's note was released, however, the stock slid a little, and is now hovering just below $60.

Both companies are rated as Neutral at Citi and those ratings will stay the same even after a merger, says Bazinet.

Twitter: @sterlingwong
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No positions in stocks mentioned.
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