Viacom may be willing to shell out all cash to cover the $10.6 billion purchase price for Scripps Networks Interactive.
According to Reuters, Viacom reportedly made the offer as it competes with Discovery Communications, another would-be buyer for Scripps. As the report pointed out, Discovery is not willing to go all-cash.
Reports surrounding a potential deal for Scripps—which owns networks including HGTV and Food Network—suggest that Scripps was looking for at least a 50% cash deal.
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At 50% cash, analysts believe Viacom would be in danger of a downgrade.
“However, for VIAB at a 50% cash bid, we calculate leverage would increase to 3.5x 2018E net debt/EBITDA and 3.1x 2019E, before the additional 0.5x S&P adjustments. This would clearly leave Viacom at significant risk of getting downgraded, based on our estimates,” wrote analyst firm MoffettNathanson in a blog post.
Barclays analyst Kannan Venkateshwar said that at 50% cash, the pro-forma leverage for Discovery and Viacom (considering a price for Scripps in the mid-to-high $80 per share range) would be 3.8-3.9x, including synergies. The firm estimates Discovery’s synergies could be around $250 million to $350 million, while Viacom’s (assuming the company could cut about half of Scripps’ SG&A) would be around $400 million.
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Regardless of the synergies, Venkateshwar said ratings and subscriber trends, along with rising content costs, means there would be little room for error at such leverage.
“In the case of Viacom, this would also be a reversal of the new management team’s focus over the last six months in trying to bring down leverage levels. In our opinion, management credibility has been a key issue with Viacom over the last few years. If the company does a leveraging transaction for SNI in the midst of trying to execute on its own turnaround plan at Viacom, this would send a very confusing message overall to investors,” wrote Venkateshwar in a research note.
As Reuters pointed out, Moody’s last year downgraded Viacom to the lowest investment grade and if Viacom decided to go ahead with an all-cash bid for Scripps, Viacom would likely use its current grade as well.