Discovery chief David Zaslav, whose sizable corner of the media business is getting a lot bigger, said he had previously looked at the idea of creating a “global HBO,” but all the best series were taken.
“We couldn’t have come together with the old Time Warner. … It’s a great brand but there is nothing in the suitcase. Now the suitcase is full,” he said during a call with Wall Street analysts to dissect the combination of his company with AT&T-owned WarnerMedia.
The landscape-altering deal comes as both companies are in the midst of major course-correction aimed at countering secular declines in linear viewership and advertising spending. As AT&T grapples with high debt ($169 billion as of March 31) and the massive cost of spectrum to roll out 5G, CEO John Stankey is divesting the Time Warner assets just three years after closing the purchase. The deal completion came with some fanfare after the bruising court victory over federal regulators but the merged company continued to face a hangover for another nine months during the appeals process.
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David Zaslav, who repeatedly told investors that nonfiction streaming was a wide-open space with no rivals and disdained the clutter of premium scripted acknowledged that consumers will like Discovery+ “even more” with Godzilla vs. Kong and Game of Thrones.
He said Discovery was “too late” and “subscale” to start up its own scripted content in the U.S. Several years back, Discovery did dip into the scripted game, backing pricey projects like the miniseries Klondike and Harley and the Davidsons before realizing that the underlying material could have a more attractive financial profile in unscripted. The series Gold Rush — covering similar terrain that Klondike did in its Yukon-based drama — has since become a top-rated title for Discovery.
Both stocks rose in premarket trading on the initial announcement that WarnerMedia would combine with Discovery to create a standalone company led by Zaslav. By mid-day, though, both declined, with Discovery off more than 4% to around $34 and AT&T down a fraction, near $32.
The deal calls for AT&T to get $43 billion in a combination of cash, debt securities and WarnerMedia’s retention of certain debt. AT&T shareholders will wind up with 71% of the stock in new company and Discovery shareholders would own 29%. It will have $52 billion in 2023 revenue — $15 billion of that from streaming, according to the deal announcement. Zaslav said he sees no reason why the new entity wouldn’t eventually garner as many as 400 million subscribers. That’s a pretty significant step-up from the 35 million or so they now have on Discovery+ and HBO Max. (The latter has 44.2 million total subscribers across both pure streaming and linear HBO.)
The new company will have a hefty debt load of $55 billion. But Discovery CFO Gunnar Wiedenfels promised that would be whittled down said he’s confident the combined entity will have investment grade status when the deal closes, expected in the middle of next year.
Wall Streeters are still looking for more detail about the new company and the end streaming product. But they generally approved of a combination that will have major scale in the battle of streaming services now dominated by Neflix and Disney. Citi analyst Jason Bazinet upgraded Discovery to ‘buy’ from ‘neutral’ and said the deal was a good one for both AT&T and Discovery.
According to Morgan Stanley analyst Ben Swinburne, “The consolidation of the TV industry has been underway for some time including Discovery’s acquisition of Scripps Networks in 2018 and more recently the merger of Viacom and CBS. The playbook at a high level is clear. Remove redundant costs and reinvest those savings in content and marketing aimed at streaming scale.”
In this case, the cost savings will be at least $3 billion, Zaslav said, citing “duplicative” functions, although he noted that there might not be much overlap. He said the key “is respect and knowing what you know, and knowing what you don’t know.” (Wall Streeters seemed a tad dubious of the $3 billion number given Discovery’s longtime focus on reducing costs and WanerMedia’s previous waves of restructuring and cutbacks.)
Other analysts were more skeptical. Todd Juenger of Bernstein Research, who maintains an “underperform” rating on Discovery shares, headlined his initial takeaway “Desperate Times Lead to Desperate Actions.” While Zaslav and Stankey (particularly the former) talked up the potential in streaming, the deal pools a large number of legacy assets.
“Taking two businesses where the vast majority of the cash flow is derived from linear TV, which is in our opinion a structurally impaired business (with cyclicality as well), does not create a better business,” Juenger wrote. The deal, he said, is “an explicit acknowledgement that neither company believes it can succeed in the streaming
future alone. We don’t blame them for doing something, collecting some synergies, giving themselves more options. It’s better than doing nothing.”
Rich Greenfield of Lightshed Partners estimated that 75% of the combined entity’s pre-synergy EBITDA comes from linear networks. “This transaction is taking WarnerMedia, which is in the midst of trying to pivot hard to direct-to-consumer streaming, and adding to it a company whose earnings come almost entirely from linear cable networks and who is also trying to pivot to DTC as well,” he wrote in a blog post.
A better scenario, Greenfield has long argued, would be a combination with NBCUniversal (which WarnerMedia did explore). Cash flow will be meaningful, Greenfield added, but it cuts both ways. “The optimist would say that is a lot of cash flow to invest in DTC efforts, while the pessimist would say it is awfully hard to lean into the future when you are weighed down that heavily by the past,” he wrote.
On content, Zaslav noted the combined companies spend about $20 billion annually, which is more than any other rival. Netflix for instance said it will spend $17 billion this year. However, the numbers are not apples-to-apples since Zaslav’s includes broad-ranging expenditures like sports rights, including the Olympics in Europe.
Zaslav sang Stankey’s praises in back-to-back calls with the press and analysts, citing his “courage and conviction” in both investing in new content and buying back shows for HBO Max.
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