Discovery and WarnerMedia have closed their $43 billion merger, creating a top-scale media player and streaming contender and ending an ill-fated foray into entertainment by AT&T.
The combination will unite such disparate assets as HBO, CNN and the nearly 100-year-old Warner Bros film studio with unscripted programming juggernauts like Food Network, HGTV and 90 Day Fiancé. It is the most consequential media merger since Disney bought most of 21st Century Fox in 2019, and it leaves the kinds of questions that that mega-deal prompted about comings and goings in the executive ranks. (For now, the Discovery guard is largely in charge under CEO David Zaslav. Toby Emmerich, Casey Bloys and Channing Dungey, heads of Warner Bros Pictures, HBO and Warner Bros TV, respectively, have gotten votes of confidence.)
Under the all-stock, Reverse Morris Trust transaction, AT&T is getting a combination of cash, debt securities and WarnerMedia’s retention of some of its debt. Shareholders in the telecom giant have gotten stock representing 71% of the new company. Discovery shareholders own 29% of the new company. Despite being the minority stakeholder, Discovery has operational control. The company’s longtime CEO, David Zaslav, has assembled a management team mostly from the ranks of his alma mater, with many of them with roots back to Zaslav’s run at NBC in the 1990s and 2000s.
Warner Bros Discovery stock is expected to begin full trading on Monday, though they have already begun changing hands on a “when issued” basis. Shares ended the day up 6% at $24.43.
The deal creates one the largest pure-play entertainment entities in existence, though its stock market value at the outset is far from that of Disney, Comcast and Netflix. The company’s projected combined revenue of $49.8 million in 2022 and a projected $52 billion in 2023. That puts it in the range of Disney’s revenue, minus its theme parks and resorts, and significantly higher than NBCUniversal’s 2021 level.
The nature of the deal, which did not involve a U.S. broadcast network or multiple movie studios, enabled it to pass smoothly through the 10-month regulatory process. There were never any serious rumblings of opposition to the combination, though it does create a cable network colossus, with TNT, TBS, CNN, Cartoon Network and others joining Discovery’s portfolio of 19 networks.
Zaslav, who negotiated the deal in secret a year ago with AT&T chief John Stankey and a handful of top lieutenants from both companies, has risen to new heights as a result of the deal. A longtime fixture in New York, where he grew up, Zaslav has pledged to more visible and active in Hollywood. He bought the home famously once owned by Paramount boss Robert Evans. Few expect the energetic and demanding Zaslav to be lounging in bed reading scripts, in the style of Evans. He will be tasked with bringing together two disparate, legacy-media organizations and proving out the original thesis of the deal — that aggregating content will lead to long-term value.
For AT&T, the closing puts a punctuation mark on a costly, nearly seven-year adventure in entertainment. On the heels of acquiring DirecTV in 2015, the telecom giant then offered $85.4 million for Time Warner shortly before the 2016 election of Donald Trump. After finally sealing that deal following a lengthy, extraordinary antitrust challenge by Trump-appointed regulators at the Department of Justice, the company rebranded it WarnerMedia and began several waves of restructuring. Formerly distinct silos famously resistant to synergy efforts, HBO, Warner Bros, Turner Broadcasting and CNN began to be interwoven and scores of seasoned execs left the company.
Streaming has hastened the commingling of WarnerMedia divisions and will also fuel many of the new company’s strategic moves. HBO Max, which launched in May 2020, will ultimately be combined into a single service, though that process will take months, if not longer, for a host of technological and logistical reasons. At the close of 2021, HBO Max had 73.8 million global subscribers when combined with traditional HBO. Discovery reported 22 million paying streaming subscribers, though it did not break out the number for Discovery+ compared with other niche services it operates.
With legacy businesses still throwing off billions in free cash flow, Warner Bros Discovery is not likely to make a headlong move into streaming, however. Like its traditional peers, it has taken note of Wall Street’s recent cooling on the all-in rush to move content online. While that gaining of religion held sway in 2019 and 2020 as companies finally rose up to challenge Netflix’s longtime dominance, the question now is more about profitability. Reaching certain subscriber thresholds is only part of the story, the more pertinent question is whether those subscription revenues can be a building block of a truly profitable business.
The makeup of the executives who will oversee the push in streaming and across other areas remains a live question. Discovery has promised $3 billion in cost savings to Wall Street, which is a much higher number than prior mega-deals that have resulted in thousands of layoffs. While most of the de-layering is predicted to come in back-office and administrative functions, an array of seasoned talent in marketing, distribution, advertising, business affairs and many other areas will also be shaken loose.
Scripted film and TV projects are also relatively uncharted waters for Zaslav and the Discovery team, apart from OWN. Not only has Zaslav steered Discovery toward unscripted (after an unsuccessful attempt to mint prestige scripted shows in the mid-2010s) but he has heaped scorn on companies flocking to the scripted space. Only since joining hands with Stankey has he begun to rhapsodize about the trove of scripted franchises at Warner Bros. (The initial logo for Warner Bros Discovery carried the Maltese Falcon tagline, “The stuff that dreams are made of.”)
It’s far from certain whether the new stock will become a Wall Street darling. Content-centric issues like Paramount Global or Lionsgate have been sluggish of late. Shares in Discovery and AT&T have fallen significantly below their level before the deal was proposed.
Michael Morris, an analyst with Guggenheim Partners, has a “neutral” rating on Discovery. On the eve of the merger, in a note to clients, Morris described “attractive long-term potential for the combined entity.” Counter-balancing that, though, he wrote that there is “limited insight on go-to-market strategy and potential selling pressure from core AT&T shareholders following the distribution.”
Craig Moffett, an analyst with MoffettNathanson and a vocal critic of AT&T’s forays in entertainment, wrote an obituary of sorts for the Time Warner and DirecTV deals. “And so ends a long and ugly chapter in the storied history of a great American company,” he wrote in a note to clients this week. “Investors gave a resounding thumbs down to AT&T’s misadventure in media, and rightly so. It was born of a flawed strategy, and it was poorly executed.”
In fairness, he continued, “Of the two deals that created what AT&T briefly called ‘the modern media company,’ the acquisition of Time Warner was the lesser of two evils. The DirecTV deal was inarguably worse. Taken together, the two deals have left AT&T badly diminished, and their impact cannot be undone by simply spinning them off.”
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