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Discovery eyes US, global OTT opportunities following close of Scripps deal

Discovery Communications Inc. is contemplating possible over-the-top gambits in the U.S. and abroad as its pending acquisition of Scripps Networks Interactive Inc. nears a closing date.

The U.S. Justice Department recently cleared the deal, and company executives now expect it to close within the next month. Discovery President and CEO David Zaslav told analysts on a Feb. 27 earnings call that after the $11.76 billion Scripps transaction is concluded, the newly merged company will be "looking very hard" at what it can offer in the OTT arena, either on its own or with partners. "We will be looking hard at that domestically and internationally," he added.

Zaslav said the combined company could create "a pretty compelling offering" at a monthly price point of $6 to $8 "that would look a lot different than Amazon Prime, a lot different than Netflix [Inc.], and it could be very attractive in every language globally."

Discovery is also looking to leverage its owned intellectual property in the mobile arena. Zaslav said that Discovery is talking to AT&T Inc., Verizon Communications Inc., Vodafone, and Telecom Italia SpA about what kind of content consumers want to engage with on their smartphones. He noted that the expanded company will have programming that appeals to men and women, auto, food and home enthusiasts, as well as fans of OWN: Oprah Winfrey Network (US).

"We have a lot of stuff, and we do think pivoting to mobile and devices is a very key element to us emerging as a very different media company that's around for a long time," Zaslav said.

Relative to the merger, Discovery executives said the company's estimate of $350 million in cost synergies is looking increasingly conservative, though it did not provide a new estimate. "We look forward to providing you with greater transparency on synergy from the transaction in the future as we get our hands on more data and get a closer look at what the Scripps company looks like aligned with us," Zaslav said.

Discovery on Feb. 27 reported an 11.5% year-over-year increase in fourth-quarter 2017 revenue to $1.86 billion, up from $1.67 billion in the final reporting period of 2016.

In the U.S., fourth-quarter 2017 revenue increased 10% year over year to $892.0 million, driven by a 7% rise in distribution revenue to $402.0 million, an 8% advertising gain to $456.0 million and a significant increase in other revenue, primarily tied to contributions from The Enthusiast Network.

Excluding the impact of the OWN and TEN transactions, distribution revenue would have increased 3%, primarily driven by increases in affiliate fee rates, partially counted by a decline in subscribers, which were off 5% overall and 3% for the company's fully distributed networks. Those declines were consistent with third-quarter 2017 subscriber trends.

Advertising revenue would have improved at a 3% rate, backing out the impact of the Group Nine, OWN and TEN transactions, primarily due to strength at TLC (US) and Investigation Discovery (US) linear networks and the continued monetization of GO, the company's TV Everywhere platform, partially offset by overall lower linear audience delivery.

The programmer saw a fourth-quarter 2017 net loss available to the company of $1.14 billion, or a loss of $1.99 per share, compared to net income of $304.0 million, or 51 cents per share, a year ago.

Improved operating results were more than offset by a noncash $1.32 billion after-tax goodwill impairment charge, $59 million of after-tax Scripps Networks transaction-related costs and currency-related transactional losses compared to gains in the prior year.

The S&P Capital IQ consensus EPS estimate for the fourth quarter was 43 cents on a normalized basis and 32 cents on a GAAP basis.

Full-year 2017 revenue improved 5.9% to $6.87 billion from $6.50 billion in 2016.

The programmer posted a $337.0 million net loss, or 59 cents per share, available to the company for 2017, compared with net income of $1.19 billion, or $1.96 per share, in 2016.

The reversal came despite improved operating results and a positive after-tax from solar investments. Those positives were countered by a noncash $1.32 billion, or $2.29 per share after-tax goodwill impairment charge, $201 million, or 35 cents per share, of after-tax Scripps Networks transaction-related costs, and currency-related transactional losses compared to gains in the prior year.

The S&P Capital IQ consensus EPS estimate for 2017 was $2.03 and $1.72 on a normalized and GAAP basis, respectively.