Imperial Capital: Discovery Communications Sell-Off ‘Unnecessary’

Discovery Communications Inc. (NASDAQ: DISCA)’s reported interest in buying Twenty-First Century Fox Inc (NASDAQ: FOXA)’s regional sports networks has resulted in an “unnecessary” decline in Discovery’s stock, according to Imperial Capital.

The Analyst

Imperial Capital’s David Miller maintains an Outperform rating on Discovery’s stock with an unchanged $32 price target.

The Thesis

Market reports of Discovery’s interest in buying Fox’s RSNs are inaccurate, Miller said, naming the following reasons why he said Discovery is unlikely to bid on the Fox assets. (See the analyst’s track record here.) 

• Discovery continues to integrate Scripps Networks, which it just bought last year for nearly $12 billion.
• The company is in the process of selling its Maryland headquarters and moving to New York City.
• Discovery has already allocated $2 billion in additional sports rights.
• The company is experiencing ratings issues at its core Discovery Channel.
• Fox’s 22 RSNs nationwide would fetch a price tag of around $18.4 billion, but Discovery has already allocated nearly all of its cash flow to lower debt.

Regardless of who buys Fox’s assets, the winning bidder would face multiple secular problems, including cord-cutting.

Discovery clearly has “enough on its plate” and it is safe to assume it has no additional interest in aggregating sports rights, the analyst said. Investors may want to consider taking advantage of the recent weakness in the stock as a good opportunity to either establish a new position or, for longer-term shareholders, to add to their stake and lower their base cost.

Price Action

Shares of Discovery Communications were trading up 0.44 percent at the time of publication Tuesday morning at $27.54. 

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