Macquarie: Discovery Communications Could Be In Play As A Buyer Or A Seller

The media and entertainment space is rife with M&A activity and investors may want to consider Discovery Communications Inc. (NASDAQ: DISCA) as an overlooked play.

The Analyst

Macquarie Research's Tim Nollen upgraded Discovery's stock from Neutral to Outperform with a price target boosted from $20 to $26.

The Thesis

Discovery's acquisition of Scripps Networks is a highly accretive deal that the Street is overlooking, Nollen said in a note. Specifically, the deal will be 16 percent accretive to Discovery's EPS and 19 percent for free cash flow in year one, followed by a mid to high-20 percent rate for both metrics in year two. In fact, once the merger is finalized and on track to achieve its metrics, Discovery will likely become a player in further industry consolidation -- either as a buyer or seller.

Scripps' consolidation into one content group that spans the linear and digital space allows for simultaneous content creation and production efficiencies, Nollen said. This has already resulted in $150 million in annual digital advertising revenues that's growing at a double digit rate. The company's online content focuses mostly affluent millennials and can help offset any linear TV ad declines.

Outside of the U.S. market, Discovery's Eurosport Player is "well ahead of the pack" in achieving scale an boasts a "relatively decent" penetration with its rights to the Olympics, Bundesliga, and ATP tennis, the analyst said. This would be good enough to build an international over the top (OTT) platform.

Price Action

Shares of Discover gained more than 3 percent to $23.22 Tuesday.

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