Discovery Stock Rises as It Gets Into Hulu and Extends Sling Deal

9/25/18

By Billy Duberstein, MotleyFool

Discovery, Inc. (NASDAQ:DISCA) (NASDAQ:DISCB) (NASDAQ:DISCK) has traded very cheaply over the past few years. As more and more U.S. consumers "cut the cord" on the traditional cable bundle, Discovery's channels (which now include all Scripps Networks Interactive channels) have seen their subscriber counts decline. That, combined with the high debt load incurred for the company's 2017 acquisition of Scripps Networks Interactive, sent investors running for the hills last year. In 2017, the company's three share classes dropped from roughly 10% to roughly 21%.

However, Discovery's stock got a big boost recently, when the company announced new deals with over-the-top platforms Hulu and Sling TV. These new deals show Discovery's nonscripted content is in demand by viewers and that distributors are finding the channels attractive pieces of skinnier, more flexible packages. But is it enough to turn around the company's subscriber losses?

A pair of scissors cuts a cable cord in front of hundred-dollar bills.

CAN DISCOVERY, INC. BUCK A CORD-CUTTING DOWNTURN? IMAGE SOURCE: GETTY IMAGES.

Breaking into Hulu

The first big announcement was Discovery's "multi-year" deal with Hulu. Hulu already had three Scripps channels as part of its $40 Hulu Live offering -- HGTV, Food Network, and The Travel Channel -- but the new deal is much more comprehensive and long term.

Hulu will now exclusively license nearly 4,000 older episodes of 12 Discovery and Scripps shows including Naked and Afraid, Say Yes to the Dress, and Property Brothers. In addition, Hulu will add five live Discovery networks to its mix in December, supplementing the Scripps channels already included. The Discovery Channel, TLC, Investigation Discovery, Motor Trend, and Animal Planet will join HGTV, Food Network and Travel Channel.

In addition to these full channels, Hulu will also be the exclusive licensor of four shows from the OWN Network, which Discovery took control of in December 2017: The Haves and the Have Nots, If Loving You Is Wrong, The Paynes, and Love Thy Neighbor.

Appealing to Slingers, too

In conjunction with the Hulu deal, Discovery CEO David Zaslav said during a CNBC interview that the company had reached a renewal of its carriage deal with Dish Network for its cable bundle, along with a new deal to get Discovery's channels onto Dish's over-the-top streaming service, Sling TV.

Like Hulu, Sling already had Scripps' HGTV and The Food Network, but it will now get the full suite of live and on-demand Discovery channels. Discovery's channels will be on both Sling Orange and Sling Blue, which offer different channel mixes and streamability options.

What the deals show

While exact terms of the deals were not disclosed, Zaslav said during the interview with CNBC that the deals had "favorable economics" for the company.

Sling Orange and Blue offer different mixes of channels and streaming options, so the fact that Discovery and Scripps channels will be included in both is testament to the value distributors are seeing in Discovery's lower-cost unscripted channels. In addition, Disney will be taking majority control of Hulu once its deal with Twentieth-Century Fox closes, and the House of Mouse will likely make Hulu the cornerstone of its future streaming ambitions as it builds a powerhouse to take on Netflix.

A sigh of relief leads to gains

These skinny-bundle deals have Discovery shareholders breathing a sigh of relief. While Discovery was able to eke out revenue and adjusted OIBDA (operating income before depreciation and amortization) growth last quarter, it also shed subscribers at an alarming 5% rate from the previous year.

Discovery's new, bigger deals with these over-the-top platforms show its nonscripted content could have a place in basically every "bundle" out there -- whether traditional or streaming. The only bundle Discovery has failed to penetrate with any channel is YouTube TV, and Zaslav said at a recent conference, "We're working on it." Investors appear to be anticipating these new deals will help stabilize the subscriber losses Discovery has displayed recently.

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