Events: Entry Catalyst on Path to $40+
July 31, 2017
- 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
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:
- Diversifies the content portfolio, affording DISCK greater negotiating power with distributors
- Creates a new international growth avenue, as SNI is under-penetrated internationally relative to DISCK
- Combines resources in order to attack the OTT-driven changes to the content/Pay TV landscape
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.
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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.