The $302 million purchase of Bounce, Grit, Escape and Laff is “an authentication of the entire multicasting business,” which has needed a feel-good story. The deal also confirms Scripps’ willingness to take some chances in a TV station industry that has been more about consolidation than innovation.
At the 2008 NATPE show in Las Vegas, I remember strolling through the exhibit floor at the Mandalay Bay looking for a story.
And I found one. Among the distributors selling movies and TV shows to broadcasters were several pitching entire TV networks — so-called diginets or D2s intended for the subchannels that stations had discovered as a byproduct of their transition to digital broadcasting.
Diginets had been around for a while in one form or another, but I think they hit some kind of critical mass that year. The subchannels began coalescing into the sub-business of multicasting.
We’ve been following that business with increasing interest since then and our impression is that it has evolved into a good business with some upside.
But it was difficult to assign any real value to the business. None of the public companies with diginets break out numbers on their multicasting initiatives, and there has been no M&A to speak of in the space.
So, the business never got a great deal of respect.
That changed two weeks ago when Scripps announced that it had purchased four diginets — Bounce, Grit, Escape and Laff — from Katz Broadcasting in a deal valued at $302 million. That sounds like real money.
As one of Katz’s competitor said to me, the deal is “an authentication of the entire multicasting business.”
Let’s recap the deal, which is expected to close in October.
Although the deal is valued at $302 million, Scripps is paying just $292 million because it already had a 5% interest in the channels. And Scripps say its true cost of acquisition after tax benefits are factored out is $235 million, or eight times cash flow.
Scripps reckons that in 2018, its first full year of ownership, its new multicasting division will generate $180 million in revenue and yield $30 million in cash flow.
That’s only a 16% margin, but the Scripps execs believe they can grow the top line at a “mid-teens” pace by increasing the coverage of the networks and, more important, by replacing the remaining direct response advertising with general market advertising with its much higher CPMs. Half of Bounce’s inventory is already general market.
The deal includes hard-charging Jonathan Katz and his small band that run the four channels. They bring imitate knowledge of the business as well as entrepreneurial force. (Katz will be making his debut as a Scripps-to-be executive at Scripps’ dog-and-pony show for investors in New York on Sept. 6.)
Despite the 16% operating margin that will be a drag on Scripps’ overall margin, the deal makes sense for the company. When was the last time you heard broadcasters talking about double-digit advertising growth outside of political?
In a conference call following the deal announcement, Scripps TV chief Brian Lawlor said that the diginets will allow the company to tap into a “different pot of money’’ — that is, the network money the agencies spend in the upfronts and the scatter market. Up to now, that pot has been beyond the reach of most station groups.
“That’s really the big upside opportunity,” Lawlor said. “So, there’s a lot of running room with each of these networks.”
The deal also confirms its willingness to take some chances in a TV station industry that has been more about consolidation than innovation. That’s something that’s good to see.
At last year’s investors’ day, Scripps highlighted its national digital content plays — Newsy, Cracked, Midroll and Stitcher. That move has not been met with universal investor acclaim.
But Scripps has been rewarded greatly in the past for its boldness. Chairman Rich Boehne was there when the company moved aggressively into cable programming in the 1990s. It eventually spun off the cable division into Scripps Networks Interactive. And on July 31, Discovery Communications agreed to pay $11.9 billion to gobble it up.
“Focusing on audience segments and very specific consumer categories of advertising have long been successful strategies here at Scripps,” said Boehne on the call in a bit of understatement.
And like I said before, the deal casts a positive light on the entire multicasting business. If done right and given real support, they can be solid and stable generators of substantial cash flow. At the very least, we now know the price of a multicasting channel, 8X.
Multicasting has needed a feel-good story. Its history over the past has been marked by as many loses as wins. Does anybody remember The Tube?
I guess it’s like anything else. It’s not enough to do it. You have to do it right.
The deal is also a strong endorsement of broadcasting in its purest form — direct from the transmitter, over the air. It announces loud and clear that broadcasting is offering an increasingly rich array of programming while remaining available to all free of charge.
The OTA service, enhanced by multicasting, is one of broadcasting’s hedges against the cord-cutting that is starting to undermine the MVPDs that are, today, broadcasters’ principal distributors.
On the call, Scripps CEO Adam Symson suggested that the bet on multicasting was a bet on OTA as the perfect complement to OTT.
“Over-the-top consumers,” he said on the call, “are certainly willing to open up their wallet and pay for streaming services and for the cable connection that gets them that faster bandwidth connection, but they are equally excited and comfortable with plugging in a digital antenna to receive free, over-the-air broadcasting. That’s suddenly new found real estate for them, particularly the younger audiences.”