Discovery Communications: Entry Catalyst on Path to $40+

Discovery Communications

Events: Entry Catalyst on Path to $40+

July 31, 2017


SUMMARY INFO

  • NASDAQ: DISCK
  • Recent PPS: $23.33 (7/31 intra-day PPS)
  • FD Shares Out: 578 million (2Q17)
  • Market Cap: $13,485
  • Debt: $8,263
  • Enterprise: $21,748
  • 2018 Estimates:
    • Sales: $7,251
    • EBITDA: $2,612
    • Net Income: $1,377 ($1,836 x .75)
    • EPS: $2.38
    • Gross Leverage: 3.16x

DISCUSSION

Discovery Communications and Scripps Networks Interactive (NASDAQ: SNI) officially announced today an agreement to combine in a $14.6 billion 70/30 cash/stock transaction, with SNI shareholders receiving $63 in cash and $27 in DISCK stock (class C) with a $22.32 to $28.70 collar. Gross leverage at closing would be 4.8x, falling to less than 3.5x within two years. The transaction is expected to generate $350 million in cost synergies, and to be accretive to adjusted EPS and FCF in the first year post-closing.

Operationally, the transaction does three things:

  1. Diversifies the content portfolio, affording DISCK greater negotiating power with distributors
  2. Creates a new international growth avenue, as SNI is under-penetrated internationally relative to DISCK
  3. Combines resources in order to attack the OTT-driven changes to the content/Pay TV landscape

ENTRY CATALYST

After peaking in mid-2014 alongside a 2018 revenue estimate of more than $9 billion, DISCK’s stock price has followed the 2018 “Street” revenue estimate downward, to its current $7.25 billion. The stock has stabilized in the low- to mid-$20’s alongside largely stable 2018 revenue estimates, but has had nothing in the way of a catalyst…until today.

The SNI purchase materially enhances the quality of DISCK’s earnings power; and combined with both deal- and EOM-related technically trading dynamics, I believe the stock is currently set up for a powerful upward re-rating.

While difficult to envision a “dying business” re-rating from under 10x 2018 earnings to 17.5x, IMO the SNI transaction sets the stage for such a move, as the market’s view of the pro forma entity shifts from a “dying business” to one of a highly cash generative, ably managed, scaled global content company.

* * * * * * * * * * * *

These situations typically take time to play out. So while tempting to maximize a position in DISCK into end-of-month technical weakness, the stock could very well continue to bleed out alongside arbitrageur activity. But IMO, the bottom is extraordinarily close at hand, perhaps barring a North Korean Fat Man-led global market accident.

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