Gadfly: Malone vs Murdoch – who’s right about the future of media?


New York – When Rupert Murdoch agreed last month to sell most of 21st Century Fox to Walt Disney for $52bn, it didn’t go unnoticed that one of the biggest and oldest media moguls is almost effectively exiting the TV and film entertainment business.

If Murdoch wants out, then what does that say about the industry? 

But another billionaire – cable cowboy John Malone – is taking the other side of that bet, which makes this an interesting year for spectators. 

Malone is sticking by his own wager that Discovery Communications can become the “gravitational centre” of non-sports content and a must-have presence on streaming bundles by acquiring Scripps Networks Interactive, the operator of HGTV and Food Network.

That’s despite drops in Discovery’s stock price and declines in Scripps’ ratings and advertising revenue since the July deal announcement. Both companies are expected to report fourth-quarter results next month, with the merger set to close early this year.

Where Murdoch sees trouble ahead for programmers as cord-cutting accelerates, Malone, of course, sees cheap stocks and a bounty of financial machinations.

In recent weeks, Malone – already a significant stakeholder – spent about $8.6 million buying Discovery shares on the open market, while Discovery’s chief financial officer and one of its directors also made purchases. After making these remarks to CNBC in November, Malone is putting his money where his mouth is:

I’m going to bet that Discovery, with its ownership and control of its content, will be able to transition to direct-to-consumer platforms in a reasonably efficient way. If they successfully do that, then they are dirt cheap right now. If they can partly get there, they’re still cheap.

He’s probably right about that. Assuming analysts’ Ebitda estimates for this year, Discovery does look to be a bargain versus its own historical levels and the peer group – something Fox can’t say. Discovery fetches a 10% discount to its two-year average valuation, whereas Fox commands a 15% premium, thanks in large part to its Disney transaction. 

The counterpoint is that Discovery is loading up on debt at a precarious time.

It’s valid to be concerned about almost any company turning to the credit markets these days to create growth where there isn’t any.

However, Scripps generates a lot of free cash flow, which Discovery plans to juice with synergies it’s pinpointed. Discovery also has suspended stock buybacks until leverage comes back down to retain its investment-grade rating.

Malone has said the moratorium on repurchases explains investors’ malaise, because Discovery’s large volume of stock buybacks became “sort of an addiction”. But he and CEO David Zaslav are taking a longer-term view of the company and industry.

In another move seemingly made with an eye toward the long view, the company told employees on Tuesday that it plans to relocate its headquarters from Silver Spring, Maryland, to New York, the gravitational centre of the media world.

So while the markets are skittish –especially around every bit of data coming out on TV-viewing habits and the streaming scorecards – Discovery and its No. 1 backer are looking fairly confident. 

It’s not that the challenges aren’t real and significant, and there are sure to be more changes and pruning along the way. But shareholders’ fears are probably overdone at this stage. 

Discovery is picking up some of America’s favourite television content at a time when content is everything – Disney just validated that. 

*This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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