Liberty Media's John Malone calls the drop in Discovery's stock a 'dirt cheap' buying opportunity

Key Points
  • Discovery's shares have tumbled by more than 30 percent since July, when it announced a deal with Scripps.
  • Liberty Media's John Malone thinks the stock is a "dirt cheap" buy, he said to CNBC this week
  • Shareholders approved the deal in a special vote on Friday.
John Malone: Discovery ‘dirt cheap’ right now

Discovery Communications' shares have taken a beating since it announced its nearly $15 billion acquisition of Scripps Network, but Liberty Media Chairman and Discovery shareholder John Malone called the steep drop a "dirt cheap' buying opportunity.

Discovery shares have tumbled since the end of July, when the company announced its buyout of Scripps in a cash and stock deal. The merger brings together Scripps' largely female audience of channels such as Food Network, HGTV and the Travel Channel with Discovery's Animal Planet and the Discovery Channel.

Both companies has waxed enthusiastic about the deal, which Discovery shareholders approved overwhelmingly in a special vote on Friday. Yet most investors have been far less impressed, and have sent Discovery's stock reeling by more than 30 percent since the merger was announced.

"I'm gonna bet that Discovery, with its ownership and control of its content, will be able to transition to direct consumer platforms in a reasonably efficient way," Malone told CNBC on Thursday. "And if they successfully do that, then [the stock is] dirt cheap right now. If they can partly get there, they're still cheap."

The Discovery Communications logo is shown on the exhibit floor during the National Cable and Telecommunications Association (NCTA) Cable Show in Washington.
Andrew Harrer | Bloomberg | Getty Images

Despite the stock's drop, Malone is convinced that Scripps' existing free cash flow paired with $350 million in expected "big" cost synergies will only help the shares over time. Speaking to CNBC, he called the deal a "free cash flow engine" that would eventually return money to investors.

"If you buy something that's generating a 12 percent cash return and you buy it with 3.5 percent money, it creates a lot of free cash flow," Malone said. "And it gives you market power in the U.S. with advertisers because you now have a bigger percentage of the audience." Malone also said Discovery's global reach as increasingly opportunistic.

"More than half their revenue is offshore," he said. "They're in a great position to go direct consumer on a global basis. Outside the U.S., they're in very good shape because you don't have this big bundle coming apart phenomenon, you know? Video in Europe is cheap."

On the programming side, Malone pointed out that between Discovery's reality and documentary programming, the company can avoid entering the "food fight" over scripted programming taking place among other media peers.

He does point out, however, that as cable bundles become smaller and smaller, Discovery will need to position itself better to combat people giving up big cable packages, by transitioning to a direct to consumer model.

"You have this attrition going on as the big bundle as people are 'cord-cutting,'" Malone noted. "But what they're really doing is going from the big bundle to buying connectivity services and going out and figuring out where else to get their content."

Amid that transition, "Discovery needs to make sure they're in every small bundle. They have to make sure that they're in a position to transition to direct consumer platforms. Either their own, which they would be the core of, or somebody else's," the executive added.

Discovery's stock, traded on the Nasdaq, closed up by nearly 5 percent at 17.55 on Friday.