Repeating Discovery’s History

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“History doesn’t repeat itself, but it often rhymes.” – Mark Twain

On May the 17th of 2021, Discovery announced a merger with the media assets of AT&T (T). After an initial burst of enthusiasm, investors have turned sour on the deal. We have been through a very similar experience with Discovery (DISCA) back in November of 2017 and believe that these circumstances “rhyme.”

The reaction to the deal fits perfectly with why growth investments have dramatically outperformed value over the last five years. The big streaming players have used algorithms and massive amounts of cheap capital to throw spaghetti up against the artificial intelligence wall to produce scripted TV shows and movies. The capital markets have rewarded them for good subscriber numbers and capitalized their future earnings at high multiples in this microscopic interest rate environment. Warren Buffett compares today’s low-interest rate environment to having the pull of gravity temporarily suspended on price-to-earnings multiples.

We bought shares of Scripps TV back in September of 2016, to gain access to their HGTV, Travel Channel, and Food Network shows. We saw a gold mine of millennials eventually caring a great deal about house and home. In November of 2017, Discovery Communications saw what we saw and paid a 50% premium to buy Scripps with the blessing of the Newhouse family, their largest shareholder. The investment community didn’t like the deal and Discovery shares fell in price below the collar set to protect Scripps shareholders.

This forced us to effectively take risk on DISC(A). We then analyzed DISCA and found a compelling value-based on free-cash-flow. Unscripted shows cost 90% less to produce than scripted TV shows. The popularity of Scripps and Discovery programs have had as much success gaining a wide audience as scripted shows do. Therefore, we sold our Scripps shares and bought DISCA shares at $17.45 per share. We had a gain of 45% in Scripps, which we pocketed.

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Disclosure: This article contains information and opinions based on data obtained from reliable sources, which is current as of the publication date, and does not constitute a recommendation ...

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