Yes, Twitter is currently streaming NFL football games. As such, many media pundits out there are suggesting Disney could use Twitter for video streaming of its various television properties including ESPN.
Sure they could. But not at $30 billion which is apparently the asking price, almost double its current market cap.
Disney’s biggest acquisition in its history is the $19 billion purchase of Capital Cities/ABC back in 1995. That transformational deal brought Disney national distribution of its programming, something it sorely lacked at the time. Along with ABC came a little-known sports cable network called ESPN. We all know what ESPN has meant to DIS stock.
Could TWTR be that second transformational deal? Not on your life. This type of deal comes along but once in a lifetime, if that, and most of the time — think Time Warner Inc (NYSE:TWX) and AOL — they fail to deliver on expectations. Miserably.
Another thing to consider: Capital Cities/ABC was extremely profitable. In 1994, it generated operating profits of $1.2 billion on $6.4 billion in revenue. Twitter expects to make $689 million in adjusted EBITDA in 2016 on $2.6 billion in revenue. On a non-GAAP basis, it will be lucky to break even.
Can you see the difference? I certainly can. There’s absolutely no comparison. And it’s not as if it will be easy for Disney to flip the switch to an all-Disney, all-streaming platform without expending a boatload of cash.
Maybe I’m missing something but the risks do not seem to justify the rewards.
Instead, I see Scripps Networks Interactive, Inc. (NASDAQ:SNI), as a better option at a much lower price tag.
Forget about HGTV, Food Network and DIY Networks for a moment and consider Scripps’ other two big properties: the Travel Channel and Great American Country. Those two speak to the entire Disney brand, but especially its parks, resorts and consumer products. Disney’s famous for integrating its various businesses so that they appear seamlessly as one. There would be absolutely no integration problems with this acquisition, which can’t be said for Twitter.
How much would it cost?
Its current enterprise value is $11.7 billion. So, let’s start here. Disney’s enterprise value is currently 9.5 times EBITDA. If it were to pay the same multiple for Scripps we’re talking about an enterprise value of $14.2 billion, almost identical to Twitter’s current enterprise value.
The problem most media industry experts have with companies like Scripps is that the content isn’t live — the only segment of TV broadcasting that isn’t imploding.
“Stand-alone cable network companies (Viacom, AMC Networks, Scripps Networks, and Discovery) will continue to be challenged,” Moffett/Nathanson senior analyst Michael Nathanson recently wrote in a report. “As viewers gain more control of their programming grids the owners of non-essential and non-live content are at significant risk. Either you are live and large … or dead.”
He’s especially bearish on SNI’s future given the slowing growth of affiliate fees combined with an upward push on programming costs. A lose/lose.
Scripps doesn’t see it that way.
“Never say never, but if there was some sea change in the way consumers were accessing TV content, we’d look at that,” said Scripps COO Burton Jablin recently when talking about selling content direct to consumers. “Right now, we’re pretty happy where we are.”
So what Should DIS Do?
So, the big question for Disney is what does it want to be?
If it wants to be a lifestyle and entertainment brand, the acquisition of Scripps isn’t a bad idea. However, if it wants to be a broadcaster of live content, then Scripps probably isn’t the way to go.
At $30 billion for Twitter and $14 billion for Scripps, I’d say Disney would go with SNI and figure out how to drive live streaming with the other $16 billion.
However, if Twitter can be had at its current enterprise value, which is highly unlikely given the numbers being bandied about, then the discussion becomes a lot more interesting.
I’ll be shocked if Disney pays anywhere near $30 billion for Twitter or any other company for that matter. For me, Scripps is the better buy for Disney even if people like Michael Nathanson think it’s old school and ready for the scrap heap.
That said, I have no idea whether Disney has any interest in Scripps. It’s simply my hypothesis.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.