AT&T has agreed to spin off its WarnerMedia group and merge it with a rival programmer, Discovery Inc. Photo / AP
The telecommunications giant will spin off WarnerMedia in a transaction that will combine HBO and CNN with Oprah Winfrey's OWN and HGTV.
AT&T, the wireless carrier that thundered its way into the media business three years ago with grand visions of streaming video on millions of its customers' cellphones, wants a do-over: It has agreed to spin off its WarnerMedia group and merge it with a rival programmer, Discovery Inc., the companies announced Monday.
The transaction will combine HBO, Warner Bros. studios, CNN and several other cable networks with a host of reality-based cable channels from Discovery, including Oprah Winfrey's OWN, HGTV, The Food Network and Animal Planet.
The new company will join together two of the largest media businesses in the country. AT&T's WarnerMedia group includes the sports-heavy cable networks TNT and TBS. In addition to Discovery's strong lineup of reality-based cable channels, the company has a large international sports business.
The merger would also be a significant about-face for AT&T, a telecommunications giant better known for servicing fiber lines and cell towers than producing entertainment and courting Hollywood. Industry experts questioned AT&T's daring US$85 billion ($117 billion) purchase of Time Warner at a time when cord-cutting was only accelerating. The spinoff indicates a failed acquisition strategy.
As part of the deal, AT&T will be able to shed some of its debt and get some cash and bonds that altogether would amount to US$43 billion ($59 billion). AT&T shareholders will own 71 per cent of the new business, with Discovery investors owning the rest.
The new company will be run by David Zaslav, 60, a media veteran and the longtime chief executive of Discovery, casting into doubt the future (yet again) of the top ranks of WarnerMedia. Jason Kilar, 50, who was hired to run AT&T's media group only last year, could lose his job.
"Jason is a fantastic talent," Zaslav said on a call with reporters following the announcement.
He also praised other executives within WarnerMedia, including Toby Emmerich, the head of the film division; Casey Bloys, who runs HBO; and Jeff Zucker, the leader of CNN. Zucker and Zaslav are also longtime golfing buddies.
Zaslav said he would be looking for ways to "get the best people to stay," but he did not elaborate on his plan for the management team.
John Stankey, the head of AT&T, who appeared alongside Zaslav in the news conference via Zoom, said "Jason remains the CEO of WarnerMedia." He added: "David's got decisions he's got to make across a broad cross section of how he wants to organise the business and who will be in what roles moving forward during this transition period."
The companies said they expected the deal, which must be approved by Discovery shareholders and regulators, to be finalised in the middle of next year. The companies anticipate they will cut annual costs by US$3 billion ($4 billion) as a result of the transaction.
The new company will be bigger than Netflix or NBCUniversal. Together, WarnerMedia and Discovery generated more than US$41 billion ($56.8 billion) in sales last year, with an operating profit topping US$10 billion ($13.8 billion). Such a sum would have put the new company ahead of Netflix and NBCUniversal and behind the Walt Disney Co. as the second-largest US media company.
The deal highlights the need for even large media companies to get bigger. Traditional entertainment firms are struggling to maintain their grip on viewers as the likes of Facebook, YouTube and TikTok continue to draw big audiences. Consolidation appears to be the quickest way to buy more eyeballs — the deal could set off another round of media mergers. ViacomCBS, the smallest of the major entertainment conglomerates, is often seen as a possible target.
To compete with Netflix and Disney, both AT&T and Discovery have invested heavily in streaming. AT&T has spent billions building HBO Max, which now has about 20 million customers. Discovery has 15 million global streaming subscribers, most of them for its Discovery+ app.
The new company expects to generate US$52 billion ($72 billion) in sales and US$14 billion ($19 billion) in pretax profit by 2023. Streaming will be a big driver of that growth and is estimated to bring in US$15 billion ($20.7 billion) in revenue.
But the new company will also be saddled with plenty of debt at US$55 billion ($76 billion). Zaslav emphasised that it would be generating enough cash to pay that down fairly quickly. The combined business could spend as much as US$20 billion ($27.7 billion) a year on developing content, he added.
The merger is a significant about-face for AT&T, a telecommunications giant that got into the media business with its Time Warner foray. Industry experts questioned AT&T's deal, and now the spinoff indicates a failed acquisition strategy.
Stankey, the CEO of AT&T, has looked at its media business as a way to keep its phone customers from switching to other companies. AT&T Wireless subscribers get discounts and free access to HBO Max. A deal with Discovery could include stipulations that customers would maintain those benefits.
Before he took over as CEO last year, Stankey was the company's chief mergers strategist. But his track record has been spotty. In addition to planning AT&T's purchase of Time Warner, he was behind the company's US$48 billion ($66.5 billion) acquisition of the satellite operator DirecTV in 2015. The service has been bleeding customers for years; in February, AT&T sold part of the business to the private equity firm TPG for about US$16 billion ($22 billion), a third of what it originally paid.
Stankey hit an elegiac note in a memo to WarnerMedia staff members Monday morning.
"I will admit that I am personally disappointed and sad that I will not have the opportunity to continue this journey with you, but I am incredibly optimistic and enthusiastic about the future of the combined WarnerMedia and Discovery," he wrote.
Stankey said he planned to retain every share of stock he receives from the deal and added, "I see nothing but a bright future as the collective capabilities of the combined companies are unleashed!"
For Discovery, the WarnerMedia deal could finally give Zaslav the size and scale he has long sought. A swashbuckling executive who can recall ratings figures off the top of his head, Zaslav represents the last of the old guard in media, a hobnobbing mogul known for hosting lavish get-togethers at his house in the Hamptons in New York.
The new company would create a new kind of media behemoth, one that is still living off the fat profits of old-school cable, while spending those profits (and more) on streaming.
The deal came together very quickly. Zaslav expected to meet with Stankey at the Pebble Beach Pro-Am golf tournament in February, but both had stayed home because of the pandemic. Instead, Zaslav sent an email to Stankey to discuss a possible deal.
The two had met over the past few months "secretly from my brownstone in Greenwich Village," Zaslav said. "This is a truly exciting day. A seminal event for our respective families."
When asked at a news conference if there was any piece of the new business that he would consider selling, Zaslav was emphatic: "We want it all. We want to keep it all."
Zaslav also praised Zucker and CNN, and said that it could be expanded with Discovery's existing international news properties to make it "the world leader in news."
"Everyone wakes up and wants to know, what's going on in their world," Zaslav said. "And nobody does that better than CNN. I've been glued to CNN for the last several months."
Zaslav also talked up the movie and television-making machine that Warner Bros. and HBO have created, saying, "Success is about creative talent — in front of the screen, and behind the screen, and fighting and fighting to create a culture that supports that creative vision."
He added, "I'm going to find myself an office on the Warner Bros. lot. I'll be in New York, I'll be anywhere in the world where the creatives are — to strive to drive the best creative culture in media today."
Even with increased competition, HBO remains a standout in television and last year, once again, captured more Emmys than any other network, studio or platform, including Netflix. It has several hit shows, including Succession, Curb Your Enthusiasm, Barry and Last Week Tonight With John Oliver. It also has a huge library that includes The Sopranos, Game of Thrones and Sex and the City.
The Warner Bros. TV studio likewise has produced successful shows for both its parent company, WarnerMedia, and outside studios with series like Ted Lasso (Apple TV+), Riverdale (CW), The Flight Attendant (HBO Max) and The Bachelor (ABC). The Warner Bros. movie studio recently released movies like Godzilla vs. Kong, Mortal Kombat and has big coming releases like Dune and The Matrix 4.
Several Wall Street analysts lauded the deal, and one suggested there might yet be a fight for some of these assets.
"One is left wondering whether there is more of the story yet to come," Craig Moffett, co-founder of Wall Street research firm MoffettNathanson, wrote in a note Monday morning. "What now for Comcast, for example?"
The cable giant is unlikely to make a play for CNN or the Warner Bros. studio, "but one could argue that HBO is a must-have," he said. "There are potential other parties who may feel the same."
Written by: Edmund Lee and John Koblin
© 2021 THE NEW YORK TIMES
The event is described as a series of aggressive sales pitches.