After news of the impending deal leaked over the weekend, AT&T has confirmed its deal to spin off its media assets and combine them with Discovery's suite of reality-TV-focused entertainment properties to create a new streaming rival with the heft to compete with Disney and Netflix.
As several media outlets including CNBC and the FT pointed out, the $43 billion spinoff/tie-up is the latest step by AT&T CEO John Stankey (who took over as chief executive last year) to unwind his predecessor's expansionist legacy (even at a loss), and instead refocusing the company on its core business. The deal will involve selling all of the WarnerMedia assets acquired under Jeff Bewkes for roughly half of what the company paid for them back in 2018.
Discovery shares (Discovery was among the tech and media stocks ensnared in the Archegos blowup) soared 19% in the premarket trade, while AT&T shares climbed more than 4%, a sign that the market approves of the deal to create yet another streaming competitor in a market that has seen a flurry of new entrants over the past year.
AT&T’s dollar bonds may rally behind their euro counterparts. Meanwhile, Goldman Sachs and JPMorgan are providing $41.5 billion in bridge loans.
AT&T's vast WarnerMedia holdings, which include CNN and HBO, will combine with Discovery's assets - including Discovery Channel and Animal Planet - to create what management hopes will be a formidable competitor to Netflix and Disney. The WarnerMedia division includes the TBS, TNT and HGTV cable channels, and other names in their media portfolio such as HBO, and would constitute one of Hollywood's most valuable catalogues.
FT reports that David Zaslav, Discovery’s long-serving chief executive, will lead the combined newly publicly trade company, which will be 71% owned by AT&T shareholders. Jason Kilar, the executive brought in last year to accelerate WarnerMedia’s shift to streaming with HBO Max, was not mentioned in the merger filing, and it's not clear whether he will have a role in the new company.
However, even though AT&T's shareholders will retain majority control over the new company, Discovery's management will control the new company.
As the FT points out, the deal "represents a humbling retreat for AT&T, which ran up one of corporate America’s biggest debt piles in a gamble to become the world’s biggest vertically integrated content and distribution company. "This should put an end to the debate about synergies between content and distribution," said Jonathan Chaplin, analyst at New Street Research, who called the deal "complete capitulation".
AT&T's board of directors met Sunday to approve the deal, which is expected to be announced in the coming days.
The combination would merge one of Hollywood’s most valuable catalogues — spanning the Warner Bros film and television studios, the HBO network and a portfolio of cable channels including CNN — with Discovery, which has had success with a new streaming service aimed at unscripted cooking and home renovation shows.
After years of watching Netflix dominate the streaming landscape, the world’s largest media and tech companies have sought to fight back with their own services. In the past year and a half, Disney, Apple, WarnerMedia, Comcast, Discovery and others have launched streaming platforms as they battle for a piece of the future of entertainment.
Two years ago, AT&T CEO John Stankey and Discovery head David Zaslav discussed combining their programming into an $8/month streaming service which would exclude HBO, however Disney's announcement that it would drop its Star Wars, Pixar, Marvel and Disney Classics catalogue into a $7/month streaming service caused Stankey and Zaslav to scrap the plan. Instead, Stankey created HBO Max, combining HBO with the rest of WarnerMedia's programming.
Analysts noted that, now that AT&T has committed to a deal, a rival bid for Discovery from one of AT&T's media rivals might emerge. Writing before the announcement of the deal, Citi analyst Jason Bazinet said he could imagine "several other potential suitors entering the fray" for Discovery or to propose a competing merger with WarnerMedia. "We would not rule out Comcast, Disney or ViacomCBS getting involved," he wrote. To be sure, the two companies included termination fees under the deal that would see AT&T pay $720M (and Discovery $1.8 billion) if the deal falls through.