May 16, 2021
AT&T merges media assets with Discovery in US$130B deal
AT&T, Discovery merge media assets
AT&T Inc. agreed to spin off its media operations in a deal with Discovery Inc. that will create a new entertainment company, merging assets ranging from CNN and HBO to HGTV and the Food Network.
The transaction values the combined entity at about US$130 billion including debt, based on WarnerMedia’s estimated enterprise value of more than US$90 billion.
AT&T will receive US$43 billion in cash, debt securities and debt retention, with its shareholders getting stock representing 71 per cent of the new company, the companies said in a statement Monday. The deal is structured as a tax-friendly Reverse Morris Trust.
The plan, first reported by Bloomberg News, would combine Discovery’s reality-TV empire with AT&T’s vast media holdings, creating a formidable competitor to Netflix Inc. and Walt Disney Co. It marks a retreat for AT&T’s entertainment-industry ambitions after years of working to assemble telecom and media assets under one roof. AT&T, now the world’s most heavily indebted nonfinancial company, gained some of the biggest brands in entertainment through its US$85 billion acquisition of Time Warner Inc., completed in 2018.
Discovery Chief Executive Officer David Zaslav is to lead the new entity. The future of WarnerMedia CEO Jason Kilar, meanwhile, has yet to be determined, AT&T CEO John Stankey said on a conference call discussing the deal.
The transaction includes all of AT&T’s WarnerMedia operations. In addition to CNN and HBO, WarnerMedia owns Cartoon Network, TBS, TNT and the Warner Bros. studio. Discovery, backed by cable mogul John Malone, controls networks such as TLC and Animal Planet. The new company’s name will be announced this week, Zaslav said on the conference call.
“This agreement unites two entertainment leaders with complementary content strengths and positions the new company to be one of the leading global direct-to-consumer streaming platforms,” Stankey said in the statement. “It will support the fantastic growth and international launch of HBO Max with Discovery’s global footprint and create efficiencies which can be reinvested in producing more great content to give consumers what they want.”
Discovery shares initially jumped on news of the deal, but they began to slip later Monday and were down as much as 4.5 per cent to US$34.05. AT&T climbed 1 per cent to US$32.56 as of 12:30 p.m. in New York.
In shedding the assets, Stankey has been unwinding an acquisition spree undertaken by predecessor Randall Stephenson. The deal underscores the difficulty telecom companies have had finding a payoff from their media operations. Verizon Communications Inc. announced its own plan to slim down earlier this month. The company agreed to sell its media division to Apollo Global Management Inc. for US$5 billion, a move that will offload online brands like AOL and Yahoo.
“I expect AT&T is going to be the No. 1 telecom and communications company in the world,” Zaslav said on the conference call. And the new combined entity “will not stop until we have the No. 1 global entertainment company, reaching people on every device.”
Though he has questioned in the past whether news content was a good fit with Discovery, Zaslav said the new company would keep CNN and “lean into news.”
Kilar, a streaming-industry veteran who helped found Hulu, has been running WarnerMedia for the past year. At a recent investor conference, he defended the need for the business to be owned by AT&T, saying the telecom company had invested billions of dollars in HBO Max and broken down silos within the company to create a single operating unit. He added that AT&T’s phone and broadband customers were less likely to cancel if they got HBO Max, and many of HBO Max’s subscribers were AT&T customers.
At Discovery, Zaslav has helped the company grow through acquisitions, including a purchase of HGTV owner Scripps Networks Interactive Inc. in 2018.
Discovery shares experienced a meteoric rally earlier this year but had lost more than half their value since Bill Hwang’s Archegos Capital Management was forced to liquidate its positions. The shares remained up 18 per cent for the year through the end of last week. That gave the company a market value of almost US$24 billion. AT&T, meanwhile, gained 12 per cent in 2021, giving it a market capitalization of US$230 billion.
LionTree LLC and Goldman Sachs Group Inc. advised AT&T on the transaction, while Allen & Co. and JPMorgan Chase & Co. worked with Discovery. Perella Weinberg Partners also provided advice to Discovery’s independent directors.
Stankey has been cleaning house at the sprawling telecom titan, cutting staff and selling underperforming assets. The company has been funneling money into rolling out its 5G wireless network, which requires billions of dollars of investment, as well as expanding its fiber-optic footprint.
What Bloomberg Intelligence Says
“We believe Comcast could add its NBC unit to the bidding mix. An NBC-Warner matchup would combine two powerful studios and streaming platforms while a scaled TV network unit with US$12 billion in Ebitda could better weather secular declines and generate US$2 billion in cost savings.”
--Geetha Ranganathan, media analyst
The carrier has been boosting movie and television production to attract subscribers to its HBO Max streaming service. It also needs cash to pay down debt. AT&T racked up borrowing of US$200 billion after an acquisition spree, and though it’s been reducing what it owes, it now has bills from a recent spectrum auction.
AT&T was the second-highest bidder in the Federal Communications Commission’s sale of airwaves, committing US$23 billion. Verizon, the top bidder, agreed to pay US$45 billion.
The Discovery agreement comes just months after AT&T reached a deal to spin off its DirecTV operations in a pact with buyout firm TPG. AT&T also agreed in December to sell its anime video unit Crunchyroll to a unit of Sony Corp. for US$1.2 billion.
And the company has parted with its Puerto Rico phone operations, a stake in Hulu, a central European media group and almost all its offices at New York’s Hudson Yards.
Stephenson had spent his 13-year tenure as CEO bulking up the company. Stephenson, who handed the reins to Stankey last year, even kept a color-coded roster of companies he wanted AT&T to buy, leading to 43 acquisitions.
But critics such as activist investor Elliott Management Corp. complained about the strategy, urging AT&T to focus on its core business. AT&T’s mountain of debt also put pressure on the company to cut staff and sell assets.
The Discovery deal represents an admission that AT&T’s audacious plan to build a media and communications conglomerate was a costly misfire.
Elliott weighed in on the news Monday morning, praising Stankey’s efforts to redirect the Dallas-based phone company.
”It has been a transformational year at AT&T,” Jesse Cohn, managing partner, and Marc Steinberg, portfolio manager, said in a statement. “AT&T has now executed on its promise to streamline operations and refocus on its core businesses.”
Analysts see antitrust risk to the Discovery tie-up as low. By creating a large collection of cable channels, one question for competition authorities is whether the combined company would have increased leverage over pay-TV distributors that could lead to higher prices for consumers.
But the Department of Justice in 2018 approved a much larger media merger with Disney’s purchase of film and TV assets held by 21st Century Fox.
“If the DOJ did not think that combining those cable assets caused market harm, it is a little difficult to see the kind of economic harm that a smaller combination could cause, particularly as the economic power of cable assets is diminishing as the power of streaming assets grows,” Blair Levin, an analyst at New Street Research, said in a note Monday.
The Discovery deal also unwinds the AT&T-Time Warner combination that the Justice Department argued was illegal, a challenge that ultimately failed.
Since then, consumers’ streaming options have proliferated, which will ease the path to approval, according to Bloomberg Intelligence analyst Jennifer Rie. She expects a review that could last up to a year and may require the new company to sell some assets or agree to arbitration provisions if there are disagreements with cable companies over distribution deals.
“That result is far more likely than the DOJ trying to go to trial again after the loss the first time,” she said.