Discovery and WarnerMedia have closed their long-awaited mega-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.)
Warner Bros Discovery stock is expected to begin full trading Monday under the ticker symbol “WBD.” It has already begun changing hands on a “when issued” basis. Shares ended the day up 6% at $24.43.
Under the all-stock, Reverse Morris Trust transaction, AT&T gets $40.4 billion in cash, debt securities and WarnerMedia’s retention of certain debt. Shareholders in the telecom giant now own 71% of the new company (about 1.7 billion shares), getting 0.241917 shares of WBD for each share of AT&T common stock they held at the time of the close. Discovery shareholders own 29% of the new company. In addition to their new shares of WBD stock, AT&T shareholders continue to hold the same number of shares of AT&T common stock they held just prior to the close.
Despite being the minority stakeholder, Discovery has operational control of WBD. The company’s longtime CEO, 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.
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 has a projected combined revenue of $49.8 million in 2022 and $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 total.
In the announcement of the deal’s close Friday, Zaslav called it “an exciting milestone not just for Warner Bros. Discovery but for our shareholders, our distributors, our advertisers, our creative partners and, most importantly, consumers globally,” Zaslav said. “With our collective assets and diversified business model, Warner Bros. Discovery offers the most differentiated and complete portfolio of content across film, television and streaming.”
AT&T chief John Stankey, who sent a congratulatory note to WarnerMedia staffers earlier in the day, added in the release, “We are at the dawn of a new age of connectivity, and today marks the beginning of a new era for AT&T.” As it continues to pivot away from film, TV and owned streaming platforms, he said, AT&T will “invest at record levels in our growth areas of 5G and fiber.”
The nature of the deal, which did not involve a U.S. broadcast network or multiple movie studios, enabled it to pass smoothly through a 10-month regulatory process and close earlier than initial forecasts. There were never any serious rumblings of opposition to the combination, though it does create a colossus on the cable side, with TNT, TBS, CNN, Cartoon Network and others joining Discovery’s portfolio of 19 networks. Previous horizontal mergers, like CBS and Viacom and Discovery’s last major transaction, buying Scripps Networks Interactive, also pooled vast cable assets together.
Zaslav, who negotiated the deal in secret a year ago with Stankey and a handful of top lieutenants from both companies, has risen to new heights of prominence as a result of the deal. A longtime fixture in New York, where he grew up, Zaslav has pledged to be more visible and active in Hollywood and operate Burbank-based Warner properties in a hands-on fashion. He bought the Beverly Hills house famously once owned by Paramount boss Robert Evans. Few expect the hard-charging Zaslav to be lounging in bed reading scripts as Evans did. He will be tasked with bringing together two disparate, legacy-media organizations and proving out the original thesis of the deal — that aggregating a vast storehouse of content will yield success in the streaming age.
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 with Discovery+, though that process will take months, if not longer, for a host of technological and logistical reasons. (CNN+, which launched last month, is another candidate for consolidation.) At the close of 2021, HBO Max had 73.8 million global subscribers when combined with traditional HBO. Discovery had 22 million paying streaming subscribers, though it has not broken out the number for Discovery+ compared with that for other niche services focused on food or golf.
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. Zaslav made headlines earlier this year by affirming that he is “not trying to win the spending war” in streaming. Like its traditional peers, the company has taken note of Wall Street’s recent cooling on the all-in rush to move content online. While the zeal for going all-in on streaming held sway in 2019 and 2020 as companies finally rose up to challenge Netflix’s longtime dominance, the focus now is more on 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 full makeup of the executive teams overseeing the push in streaming and across other areas remains a question that is not completely settled. 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 derided the crush of companies entering the scripted space. As Discovery absorbed Scripps and its portfolio of lifestyle networks, he favored a metaphor of a kids’ soccer game, with a bunch of kids chasing the scripted ball and Discovery in an open part of the field looking to score unscripted. 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 is also uncertain whether the new stock will become a Wall Street darling. Content-centric issues like Paramount Global or Lionsgate have been sluggish of late as investors debate whether they are suited for the transition of legacy entertainment to the cloud. Shares in Discovery and AT&T have also fallen significantly below their level before the deal was proposed, not the most auspicious of signs.
Michael Morris, an analyst with Guggenheim Partners, maintained a “neutral” rating on Discovery shares. On the eve of the merger, in a note to clients, Morris reaffirmed his rating. He described “attractive long-term potential for the combined entity” but also cited “limited insight on go-to-market strategy and potential selling pressure from core AT&T shareholders following the distribution” as reasons for pause.
Craig Moffett, an analyst with MoffettNathanson and a vocal critic of AT&T’s explorations in entertainment, penned 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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