A few weeks ago, employees at Discovery Communications Inc. noticed the free Starbucks coffee they enjoyed daily in the office kitchens had disappeared. In its place appeared a machine that doled out java of unspecified provenance, for which employees pay 50 cents per cup.
The coffee switch could mean only one thing, according to an employee rumor mill that divined the change as a cost-cutting measure to impress potential investors: Discovery is going public.
Some think Silver Spring-based Discovery may be positioning itself to begin an ambitious round of acquisitions.
(James M. Thresher -- The Washington Post)
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Speculation about the Silver Spring media company going public or being sold have circulated at Discovery and around Wall Street many times before, but never so forcefully as last week, when a major shareholder restructured his stake in the company, and new public filings disclosed that Discovery turned a profit last year of $168 million. On Tuesday, Discovery's largest shareholder, Liberty Media Corp., said it planned to spin off its roughly 50 percent stake in Discovery and its 100 percent stake in Ascent Media Group Inc., a Santa Monica media services firm, into a new publicly traded holding company called Discovery Holdings. If Cox Communications Inc., the privately held Atlanta cable operator, and Advance/Newhouse Communications Inc., the private company controlled by Samuel "Si" Newhouse Jr. and his brother Donald Newhouse, agree to put each of their roughly 25 percent stakes in Discovery into the spinoff, Discovery Communications will effectively become a public company.
Liberty Media's restructuring, and the possibility that Discovery can raise capital more quickly as a publicly traded entity, raised speculation that the company may be positioning itself to begin an ambitious round of acquisitions. With $2 billion in annual revenue and 1 billion -plus subscribers worldwide, Discovery is a dominant force in "non-fiction" cable programming for channels like Animal Planet, the Learning Channel, and the eponymous Discovery Channel.
In a conference call with analysts last week, Liberty Chairman John C. Malone said the restructuring would help Discovery "further consolidate the industry or take advantage of acquisition opportunities in the business that will extend their reach both domestically and internationally."
Though specific takeover targets have not been mentioned, analysts said that the Food Network and HGTV, both part of the Scripps Howard network, are the types of media properties Discovery would likely begin shopping for. To showcase Discovery's growth to prospective shareholders, Liberty last week released more detailed financial information on Discovery than it has in the past, including the company's net income and losses for 2002 through 2005. Documents filed with the Securities and Exchange Commission show that after a $48 million loss in 2002, the 20-year-old company turned a $63 million profit in 2003 and expanded that to $168 million in 2004.
The last time Liberty disclosed Discovery's earnings was 1999, said spokesman Michael Erickson, when losses of $247 million were reported.
Erickson said Liberty chose to release net income figures after a five-year lull to make the new Discovery Holdings "more shareholder friendly." As a private company, Discovery Communications is not required to disclose financial information to the public, nor was publicly traded Liberty Media obligated to break out Discovery's information in its own filings.
Analysts shrugged at the net income figures, which they said were in line with their own estimates.
"Discovery has been as transparent as any other group of cable networks I can think of," said Bishop Cheen of Wachovia Securities LLC.
