Description

“I’ll paraphrase Charlton Heston and say that the only way anybody is going to get my Discovery stock is out of my cold, dead hands.”*

– Dr. John C. Malone, Liberty Media’s 2005 Investor Meeting

*Note well: I realize the quote above is a little dated (Malone has sold a few shares in recent years and has given current CEO David Zaslav the right of first refusal to purchase his stock), but I believe that there is still something to be gleaned from the statement.

Investment Thesis:

The shares of Discovery Communications (“DISCK” or “the Company”) have been under pressure over the past seven months, declining by nearly 30%  compared with a 5% gain for the S&P 500 and trailing a number of its media peers including Disney (+20%) and Time Warner (+10%) by a wide margin. At current levels, I believe Discovery’s valuation (trading at a discount to industry peers and precedent cable network transactions) already reflects investor concerns (recent industry ratings softness, OTT/SVOD threats, FX headwinds, among others) but does not provide enough credit for a number of items that should favorably impact the Company’s future valuation including:

• Robust Affiliate Fee Renewals Thanks to Market Share Gains and Digital Rights Monetization – Discovery is currently extracting double digit affiliate fee increases from its U.S. distributors thanks to market share gains (share of primetime viewers aged 25 to 54 has increased from 7% in 2008 to roughly 12% today) and the fact that DISCK is now offering its distributors so-called TV Everywhere rights. I believe the recent push back of the CMCSK/TWC merger close date to mid-2015 bodes extremely well for DISCK due to the fact that its current affiliate fee agreement with CMCSK expires in June. I suspect CMCSK, which is DISCK’s largest domestic distributor, will unlikely want to become involved in a contentious negotiation prior the merger’s close and as a result this could enable DISCK to secure a very favorable renewal. It should also be noted that DISCK moved up its popular Shark Week programming this year (early July vs. August), which should provide it with additional negotiation leverage.

• Realization of Benefits from Past and Ongoing Network Rebrandings – Discovery has successfully rebranded a few of its underperforming networks in recent years including Discovery Times (now known as Investigation Discovery) and Discovery Health, which became the Oprah Winfrey Network (OWN) in January 2011. Under the direction of veteran media executive Henry Schleiff, Investigation Discovery has been an unqualified success moving from a top 55 ranked network to the number 4 overall Women’s network (# 2 Women’s channel during daytime) over the past 5 years. Meanwhile, OWN, which got off to a slow start, continues to gain momentum after posting its first quarterly profit during the fourth quarter of 2013. The recent transition of the underperforming Hub Network to Discovery Family (October 2014) and Discovery Fit & Health to Discovery Life (January 2015) should provide DISCK with additional opportunities to drive growth and boost profitability. Notably, the Discovery Family and Discovery Life refreshes will be overseen by Mr. Schleiff.

• Opportunity to Expand International Profitability via Increased Scale from Recent Acquisitions - The recent acquisitions of SBS Nordic and Eurosport, which command margins lower than the historical International Networks segment, have driven down overall International Networks’ adjusted OIBDA margins to ~36% or ~800 basis points below the 44% margins the International Networks segment commanded prior to the acquisitions. DISCK should be able to improve the margins of the acquired businesses through its scale (more bargaining power over distributors) and by leveraging its local ad sales team.

• Low Pay-TV Penetration Outside of U.S. Provides Long Runway For Future Growth – Discovery will likely be the beneficiary of increased pay-TV penetration around the globe in the coming years. Not only is pay-TV penetration low in a number of emerging markets (Brazil, Mexico, etc.), but there are several developed countries such as the UK and Italy where further pay-TV adoption will likely occur. Higher penetration rates provide the opportunity to capture additional revenue through increased affiliate fees (more subs) and higher advertising revenues (larger audiences).

• Content Companies Likely to Counter Pay-TV Consolidation with M&A – DISCK Is Prime Target –I would expect content companies to counter the recent round of distributor consolidation with M&A of their own. Discovery, with a $21 billion market cap could be easily digested by a number of larger content companies including Disney ($184 billion), Fox ($71 billion), and Time Warner ($70 billion), among others.

• Aggressive Repurchases Should Continue – Discovery is a strong cash flow generator and has been an aggressive acquirer of its own shares. Just since 2010, the Company has deployed over $5.7 billion towards repurchases, reducing diluted shares outstanding by 27%. I would expect buybacks to continue and would note that DISCK’s free cash flow generation - notwithstanding some recent FX pressures - is poised to accelerate aided by moderating content costs and an improved tax rate. DISCK’s content spending is expected to moderate to a mid to high single digit growth rate from mid-teens rate while the tax rate is expected to decline below 30% by 2017 (~35% in 2014). Discovery recently paid a special stock dividend (more liquidity for K shares), which was primarily effectuated to facilitate more aggressive repurchases.

Business Overview:

Discovery Communications is one of the world’s largest (based on subs) pay-TV programmers reaching more than 2.6 billion cumulative subscribers in over 220 countries. Discovery’s portfolio of global networks include the flagship Discovery Channel as well as TLC, Animal Planet, Investigation Discovery, Science and Velocity (Turbo outside of the U.S.). During 2014, DISCK generated $6.3 billion in revenue and $2.5 billion (pre-corporate) of OIBDA from its three primary business segments:      

• International Networks (50% of total revenue; 40% of OIBDA)

  - (~49% distribution; ~51% advertising)

• U.S. Networks (47%; 60%)

  - (~45% distribution; ~55% advertising)

• Education and Other (3%, NM)

Key components of DISCK’s business model include:

• Dual Revenue Stream – Discovery generates its revenues primarily from two sources: advertising (~55% of 2014 revenues) and distribution (~45%). The balanced revenue mix compared to peers, which tend to derive a much larger percentage of revenues from advertising, provides a more resilient revenue stream in my view.
  
  

• Multi-Year Affiliate Fee Agreements – Agreements with U.S. distributors are usually 4 to 6 years on average with international agreements slightly shorter in duration. Discovery generates 45% of its revenues from distribution agreements, more than any of its media peers (TWX: 36%; VIA: 34%; Fox: 30%).
  
  

• Content Ownership and Library – Discovery is able to leverage its primary non-fiction oriented content, which tends to have universal appeal, over multiple geographies at minimal cost. Over 50% of the Company’s content produced for its U.S. Networks is utilized on international versions of its networks. It should be noted that DISCK boasts a library consisting of hundreds of thousands of hours of owned content that should position it to navigate OTT/SVOD threats better than its competitors in the coming years.
  
  

• Minimal Capital Intensity – One of the attractive features of cable networks is their asset light business model that enables them to throw off a meaningful amount of free cash flow. DISCK is no exception with capex as a % of revenue averaging just 1.8% over the past four years. Thanks to its low capital intensity and high levels of profitability (2014 consolidated OIBDA margins: 40%), Discovery has generated an average of $1.1 billion in annual FCF over the past 4 years.
  
  

Robust Affiliate Fee Renewals Thanks to Market Share Gains and Digital Rights Monetization:

While Discovery’s U.S. Networks command a ~12% market share (primetime viewers aged 25-54), the Company generates just 5% of industry subscriber fees. I believe this gap is poised to close as the Company capitalizes on its recent market share gains (current 12% share is up from 7% share in 2008) and begins to monetizes its digital rights. Discovery has been slow to embrace the monetization of its content over non-traditional platforms, but has recently begun to offer TV Everywhere rights to its pay-TV distributors, which is helping DISCA realize double-digit increases (step up amount with ~low/mid-single digit escalators) when renewing affiliate fee agreements. Discovery’s affiliate fee renewal with Time Warner Cable in 2013 was the first to include multi-platform access to Discovery’s content.

In early 2015, Discovery CEO David Zaslav noted in a CNBC interview that the Company has been able to extract low teens affiliate fee increases from its U.S. distributors during recent renewals (~20% of its U.S. agreements come up each year). I believe the recent push out of the expected CMCSK/TWC merger completion date until mid 2015 bodes well for a favorable renewal from its largest U.S. distributor. Discovery recently stated that excluding Comcast, it expects to experience a high single digit increase in its domestic distribution revenues for 2015. Comcast, whose agreement with Discovery is up for renewal in June 2015, could present DISCK with an opportunity to continue the trend of double digit affiliate fee renewals. Given Comcast’s motto of giving its consumers the ability to access content wherever and whenever they want it, I believe that Comcast will look to secure these expanded rights during the upcoming renewal. If Discovery ends up renegotiating its affiliate agreement with CMCSK prior to the merger’s approval, I suspect that the terms could be extremely favorable for DISCK as CMCSK will unlikely want to be involved in a contentious affiliate fee dispute. Even if the merger closes before the agreement is renegotiated, DISCK could end up securing a strong renewal due to the fact that CMCSK’s current agreement does not contain TV Everywhere rights. As a result, I would expect CMCSK to attempt to renegotiate its deal with Discovery before it closes the TWC transaction in order to avoid tarnishing its brand with newly acquired TWC subs (if CMCSK doesn’t renegotiate with DISCK before the merger closes, the acquired TWC subs would not have TV Everywhere capabilities since they would revert to Comcast’s current agreement). In addition, it is also interesting to note that Discovery has moved up its popular annual Shark Week program that airs on its flagship network to July this year (usually held in August), which should also give it some additional bargaining power. During 2014, Shark Week delivered its highest ratings in its 27 year history, attracting more than 30 million global viewers.

Realization of Benefits from Past and Ongoing Network Rebrandings:

Discovery has successfully rebranded a few of its underperforming networks in recent years, which has driven subscriber gains and boosted advertising revenues. Over the past six years, seven Discovery networks have undergone a transformation as part of an initiative to improve their operating performance. A successful cable network rebranding has meaningful long-term benefits for Discovery enabling it to generate higher affiliate fees (from increased subs and higher rates) and advertising revenues.

The most successful recent rebranding has been the conversion of the Discovery Times network in 2008 to Investigation Discovery, which is now a leading mystery and suspense network. Under the leadership of veteran cable network executive Henry Schleiff, who joined Discovery in 2009, the network has registered a significant improvement in performance. Since its launch, ID has improved from a top 55 Women’s network to the #2 ranked network for Women in the U.S. (trailing only USA) in the 25 to 54 demo. Notably, ID boasts the longest length of view (cable or broadcast) of any network in the U.S. for Women ages 25-54 and also recently received the distinction as the #1 network for viewer satisfaction in the Beta Research Digital Subscriber Study. ID’s audience has increased at a double-digit annual rate since its launch in 2008. ID’s subscriber base has increased from 65 million (55 million U.S. and 10 million International) in 2009 to 190 million (86 U.S. 104 million international) at year end 2014.

Despite ID’s strong viewership results and  subscriber growth, the network is still underpenetrated in the U.S. with just 85 million subs as of September 2014, well below the ~95-100 million subs of fully distributed cable networks. There is also an opportunity to generate increased affiliate fees from higher pricing with ID’s monthly subscriber fee believed to be roughly $0.10 below comparable networks. In addition, advertising rates for the network are not reflective of the network’s attractive audience and viewership gains, but the Company expects the cost per thousand (CPM) differential with peers to close in the coming years. During Discovery’s 1Q 2014 earnings call Discovery CEO David Zaslav stated, “Even though ID is the number four network in America for Women we still don’t get the pricing that we think we deserve on that. … You’re going to see sustainable growth in our pricing on ID for the next two years at least before we get to where it should be.” Given the universal appeal of the network’s “crime” content, the rebranding is also having a favorable impact on the Company’s International Networks segment. ID is currently in ~160 countries and management expects that the network will be in over 200 countries within the next two years.

The successful repositioning of ID by Mr. Schleiff has not been a fluke as he orchestrated a similar turnaround of CourtTV before Time Warner took control of the brand in 2006 at an implied valuation of $1.5 billion. I believe there is significant opportunity for further improvement in a number of other underperforming brands. The following provides an overview of other recent/upcoming rebrandings at Discovery, a number of which are under the auspices of Mr. Schleiff:

• OWN - After getting off to a slow start following its 2011 launch, OWN has experienced strong viewership growth in recent years and is now a #1 network for African American Women three nights a week and is often the #1 or #2 network for all Women in America. OWN is now a meaningful cash contributor for Discovery as the network generated its first quarter of positive equity contributions for Discovery during the fourth quarter of 2013. OWN is currently in ~82 million homes and management expects the network to be in ~90 million homes over the next year and a half.
  
  

• Velocity – During 2011, Discovery rebranded its HD Theater Network as Velocity, a men’s channel featuring fishing, boats, gambling, etc. However, the Company subsequently narrowed its niche, focusing on cars. Velocity is currently in 61 million U.S. homes, but management expects the network to reach 70 million homes in 2015. While Velocity doesn’t have a deep audience base, it has a very attractive and loyal following as the network targets males with annual incomes over $150k. Notably, 82% of the networks’ advertisers only advertise on Velocity. The car-based content on Velocity is universal and as a result the Company expects to be in 150 to 200 countries over the next 2-3 years, up from 51 countries. Velocity also is the #1 network in delivery among Men ages 25-54 for networks in fewer than 65 million households.
  
  

• Destination America – Formerly operating as Planet Green, Destination America launched in May 2012 and seeks to attract a “middle America” audience with programming around travel, food, adventure, home, and natural history. Destination America was in 57 million homes as of November 2014, and management expects the network will be in over 80 million homes over the next 2-3 years. The network posted its best ever year in its key demos during 2014.
  
  

• Discovery Family – the Hub Network changed its name to Discovery Family channel in October 2014 after Discovery increased its stake in the Network to 60% (from 50%) in September 2014. As part of the increased stake in the network, Discovery has taken over operational control of the network, which is now being overseen by Mr. Schleiff. While the channel will continue to feature Hasbro Content in the daytime, the primetime programming will seek to capitalize on the favorable “co-viewing” trends experienced at the Hub during primetime and leverage Discovery’s library of programming. At 70 million subs, the network’s subscriber base is significantly below the 99 million viewers of peers Disney Channel and Nickelodeon.
  
  

Opportunity to Expand International Profitability via Increased Scale from Recent Acquisitions:

Between 2008 and 2014, Discovery’s International Networks posted an 18% and 19% CAGR in revenues and OIBDA, respectively. While International OIBDA margins expanded from 33.4% in 2008 to 44% in 2012, margins have been pressured over the past two years (current International Networks OIBDA margins of ~36% are roughly 800 bps below peak levels) reflecting the recent acquisition of lower margin business. In April 2013, Discovery acquired ProSiebenSat.1 Group’s SBS Nordic operations for $1.7 billion with the Company acquiring a controlling interest in Eurosport (~$1.1 billion implied EV) in May 2014 after acquiring a minority stake in 2012. While DISCA does not believe that it will be able improve the margins of SBS and Eurosport to prior peak segment levels, it does believe that it can grow margins from the new base and the overall segment could approach 40% adjusted OIBDA margins over the next 5 years. The following summarizes the SBS Nordic and Eurosport Opportunity:

• SBS Nordic – Although SBS Nordic operates in a relatively mature pay-TV market and its operations in the region have been well run, DISCA believes that it should be able to capitalize on its newfound scale in the region. The region also is characterized by stability with growing economies. Discovery currently has eight channels in each of the regions (Denmark, Sweden, Findland, Norway), which should allow it to command higher distribution and advertising revenues for both the SBS networks as well as DISCA’s Networks. SBS currently generates approximately 30% of its revenues from subscriber fees, which is below the ~50/50 (distribution/advertising) mix of DISCA’s International Networks. While DISCA should also be able to command higher affiliate fee pricing of its Networks in the region, advertising revenues should also benefit from cross selling the Discovery networks to SBS advertisers. During Discovery’s 4Q 2013 earnings call in February 2014, management noted that it had garnered 75 new advertising clients on the Discovery Channel and TLC in Sweden and 102 in Denmark since establishing a joint sales team after closing of the merger.
  
  

• Eurosport – Discovery believes that it should be able to leverage its international infrastructure to further expand Eurosport’s reach and drive higher advertising revenues. While Eurosport has done a good job expanding distribution (its 133 million European subs are higher than the ~100 million subs that ESPN has in the U.S.) and improving operating performance (operating margins increased to 18% in 2013 from 10% in 2007), there are a number of opportunities for Discovery to expand distribution and capture higher advertising dollars. During a September 2014 investment conference, CFO Warren stated, “I couldn’t be more bullish on that asset and that acquisition. I think it’s going to be a crown jewel for us and I think the benefit and the leverage we’re going to get out of that is going to be significant.” Discovery has a presence in each of the 50+ countries where Eurosport has current distribution. Prior to Discovery taking over Eurosport, advertising was sold on a Pan European basis versus utilizing a local sales force. During Discovery’s 3Q 2014 earnings conference call, CEO Zaslav discussed the local sales opportunity with Eurosport noting, “In addition, Eurosport previously relied almost exclusively on Pan European ad sales. The benefit of Discovery’s local teams means we can increase our inventory to sell local in addition to Pan-European, and local ad markets are significantly bigger than Pan-European.” Eurosport currently derives just 20% of its revenues from advertising, which is underpenetrated relative to mature cable networks. Additional opportunities that Discovery intends to pursue for Eurosport include expansion into India (where Discovery currently has 11 networks in 5 languages across the country) and the creation of the equivalent of regional sports networks across the region utilizing the Eurosport 2 platform.

Low Pay-TV Penetration Outside of U.S. Provides Long Runway For Future Growth:

DISCK is well positioned in a number of promising international markets where pay-TV penetration is low, but is experiencing good growth. For example, in Brazil DISCA has 5 of the top 20 channels including Discovery Kids, which is the top rated network (among all networks, not just kids) in the country. Discovery’s market share in the country is impressive given the much smaller universe of channels (~60) in the country. While pay-TV in Brazil has experienced strong growth over the past 2-3 years with penetration increasing to ~33% vs. ~20%, DISCA believes that there is room for further growth. While penetration is unlikely to approach U.S. levels, management believes 50%‑60% penetration rates are not unrealistic over the mid-long term. Even in developed markets such as the UK (57% pay-TV penetration), Italy (30%) and Australia (30%), there is opportunity for further pay-TV growth.

Low Pay-TV Penetration Around the World

Source: IHS year end 2014 estimates via Company presentation, March 2015

Content Companies Likely to Counter Pay-TV Consolidation with M&A – DISCK Is Prime Target:

Although the pending U.S. distributor consolidation could create challenges for content companies, I believe there are some positive implications from these transactions that are worth highlighting. While the CMCSK/TWC acquisition would remove a sizable industry player, it is simultaneously increasing the scale of another participant in Charter whose video subs under management will increase to 10mm (also includes Bright House subs) from 4.2mm. The aforementioned proposed distributor transactions should help preserve the current content ecosystem. In my view, this is a favorable development for content companies as these distributors now have significant resources to deploy for programming and ancillary distribution rights (TV Everywhere). Finally, I would not be surprised if the recent distributor M&A spurs consolidation among content companies. It should be noted that Discovery ($21 billion market cap) is dwarfed by a number of media juggernauts that are potential DISCA suitors including Disney ($184 billion), FOX ($71 billion) and Time Warner ($70 billion). In addition, non-traditional media companies including Microsoft, Google, and Amazon, could also be potential suitors.

Aggressive Repurchases Should Continue:

Over the past four years, Discovery has generated an annual average of $1.1 billion of free cash flow (~6% FCF yield). Notwithstanding some recent FX weakness, Discovery’s free cash flow is poised to accelerate aided in part by moderating programming expenses and a lower tax rate. After boosting its content investment to drive growth and increase market share, DISCA expects its investment in content to moderate to a mid to high single-digit growth rate from the mid-teens growth rate experienced in recent years, which I estimate to be an ~$200 million annual reduction in content spending. Discovery’s future FCF should also benefit from a lower tax rate as it produces and utilizes more of it content internationally. Commenting on the 400 bps reduction in its tax rate to 35% during the 3Q 2014, DISCK CFO Andy Warren stated, “We now have line of sight to our being able to reduce our global effective tax rate below 30% by FY 2017. This sustained year over year reduction in our tax rate will not only drive net income growth but also accelerate our free cash flow and capital availability growth as well.” Discovery is currently at the mid-point of its targeted 2.5x to 3.0x leverage range (debt/OIBDA), which is quite low for a Malone-controlled entity, especially given Malone’s leveraged equity return mantra. With increased visibility on U.S. Networks’ affiliate fees, I would not be surprised if the Company boosts its leverage target, which would provide additional capacity for future buybacks. Nevertheless, a large portion of the Company’s future FCF generation will likely be targeted for buybacks. During DISCK’s 4Q 2014 earnings call held in February 2015, CFO Warren stated, “Separately, our calculated free cash flow per share IRR remains very compelling, so we expect to continue to allocate a sustained and growing amount of our capital to share repurchases in future years.”

While sophisticated investors do not usually become excited about stock splits, Discovery’s recent stock dividend offers a meaningful catalyst for significant share repurchases. In August, 2014 Discovery distributed a stock dividend with each holder of Discovery’s Series A (DISCA) and Series B (DISCB) receiving one additional share of the Company’s Series C (DISCK) common stock. The stock dividend, which was effectively a 2-for-1 stock split, has created significantly more liquidity for the Company’s Series C shares, which currently trade at an 4.3% discount to the Series A shares.

Valuation:

At current levels, Discovery trades at ~10.5x TTM OIBDA representing a substantial discount to precedent industry transactions (see table below) and the current trading multiples of a number of its peers including Disney (13.4x), Time Warner (12.2x) and Fox (11.5x). I believe DISCK’s valuation is inconsistent with the Company’s attractive dual revenue stream business model, strong FCF generation, numerous international growth opportunities and opportunity to continue aggressively purchasing its shares at an extremely favorable valuation.

Assuming no multiple expansion and factoring in my projections for Discovery’s profitability over a 3 year time horizon (~$2 billion in U.S Networks OIBDA; ~$1.4 billion in International Networks OIBDA), I estimate DISCK’s intrinsic value to be approximately $45 to $50 a share, representing 50% upside from current levels.  If DISCK were to find itself as an acquisition target, I believe an acquirer would have to pay a significant premium to DISCK’s current valuation multiple. Under this scenario, shares have the potential to double from current levels.

Risks/Mitigants:

• SVOD/OTT Threats – While cord cutting/shaving makes for interesting headlines, there is little industry evidence to suggest that OTT services will be displacing pay-TV any time soon. During 2014, the U.S. pay-TV industry lost just 125k subs out of 95 million total subscribers. Also surprisingly (or disturbingly!) there are some surveys that suggest Netflix viewers actually end up watching more linear TV. With Discovery owning the vast majority of its content, I believe it will be able to navigate potential OTT challenges better than its industry peers. Discovery currently has two direct to consumer offerings in its international markets (DPlay and Eurosport player) and if they prove successful could help Discovery ultimately develop a direct to consumer service in the U.S.
  
  

• Recent Domestic Industry Ratings Weakness – Discovery has not been immune from recent ratings weakness within the cable networks industry in the U.S. While recent ratings trends for cable networks is concerning, there has been some question about the ability of Nielsen to accurately measure ratings in today’s multi-platform environment. During Discovery’s 3Q 2014 Discovery CEO Zaslav stated, “But when we look at the actual set-box data we see a different story. And we do think that Nielsen is quite antiquated.” In January 2015, NBCU’s CNBC network stopped using Nielsen because of its inability to accurately measure out of home viewing.
  
  

• Distributor Consolidation – While the recently proposed distributor consolidation including Comcast/Time Warner, AT&T/DirecTV and Charter/Bright House may make some investors uneasy, I believe that content companies will continue to have the upper hand in programming negotiations. Comcast has experienced high single digit annual programming expense increases in recent years despite its position as the largest pay-TV distributor. In addition, one overlooked benefit of industry consolidation is that it should help preserve the content ecosystem. Content owners in the U.S. currently receive over $100 billion from pay-TV providers and advertisers under the current distribution model. There is also a good chance that pending pay-TV consolidation will spur content M&A and DISCK makes an attractive target.
  
  

• Aggressive Sports Rights Bidding – Although DISCK is investing in sports content to bolster its newly acquired Eurosport platform, DISCK will likely be a disciplined acquirer. The Company has mainly focused on second tier sports, but has evaluated more expensive offerings such as Formula One and the Premier League. In February, 2015, DISCK CEO Zaslav stated “…we are going to be careful. We looked at Formula One and we like the idea of Formula One because it’s popular in 220 of our 230 countries, but the valuation was just way too high so we walked away.”
  
  

• FX Weakness – While recent FX weakness will have an adverse impact on results, there are some benefits. The price that Discovery could potentially have to pay to acquire Eurosport if the remaining 49% interest is put to them under the terms of the agreement could end up being ~20% cheaper (on a U.S. dollar basis). In addition, FX weakness vs. the dollar could provide an opportunity for Discovery to acquire additional international assets at more favorable prices.
  
  

• Russia – Geopolitical issues have created uncertainty regarding the Company’s revenue derived from Russia. However, it is worth noting that Russia accounts for less than 2% of DISCK’s overall revenue.

Catalyst

• Strong U.S. Affiliate Fee Renewals – DISCK recently secured double digit affiliate fee increases from select U.S. distributors and prospects for favorable renewal with largest U.S. distributor (Comcast) are encouraging and would provide long term revenue and cash flow visibility.
  
  

• Successful Network Rebrandings – Discovery has successfully repositioned a number of its networks (Investigation Discovery and OWN) over the past 6 years, which has helped increase its market share. The recent re-launch of Discovery Family and Discovery Life provides an opportunity for DISCK to realize additional market share gains.
  
  

• International Margin Expansion – Opportunity to improve margins of recently acquired international businesses due increased scale and leveraging local ad sales force.
  
  

• M&A Target – I would expect content companies to counter the recently proposed pay-TV distributor consolidation (CMCSK/TWC, AT&T/DTV, Charter/Bright House) with their own M&A and Discovery is a prime acquisition candidate.
  
  

• Aggressive Share Repurchases – Continued aggressive repurchases thanks to strong free cash flow generation aided in part by moderation of content costs and reduced taxes. Recent stock dividend provides improved liquidity to facilitate repurchases.