AT&T Prepares To Merge Multimedia Assets With Discovery

(Bloomberg) – AT&T Inc. is in talks to combine its media operations with Discovery Inc. in a deal that would create a new entertainment powerhouse, people with knowledge of the matter say, a startling move for a company that has spent $ 85 billion . acquire the assets less than three years ago.

A deal could be announced as early as this week, said the people, who asked not to be identified because the information is private.

The idea is to combine Discovery’s reality TV empire with AT & T’s vast media collections, creating a company that would be a formidable competitor to Netflix Inc. and Walt Disney Co. Any deal would mark a change. major in AT & T’s strategy after years of telecom and media assembly work under one roof. AT&T has acquired some of the biggest brands in entertainment through its acquisition of Time Warner Inc., which closed in 2018.

The deal would underline the difficulty that telecommunications companies like AT&T and Verizon Communications Inc. have had to derive from their media operations. Through its WarnerMedia unit, AT&T owns CNN, HBO, Cartoon Network, TBS, TNT and the Warner Bros. studio. Discovery, backed by cable mogul John Malone, controls networks such as HGTV, Food Network, TLC, and Animal Planet.

CEO David Zaslav helped Discovery grow through acquisitions, including a purchase from HGTV owner Scripps Networks Interactive Inc., which closed in 2018. Discovery’s Class A shares rose more than 18% this year, valuing the company at nearly $ 24 billion. AT&T gained 12%, giving it a market cap of $ 230 billion.

The companies are still negotiating the structure of a deal, and details could change or talks could collapse, the people said. Representatives for AT&T and Discovery declined to comment.

Sell ​​assets

AT&T CEO John Stankey has cleaned up the house of the sprawling telecoms titan, downsized staff and sold underperforming assets. The company has invested money in deploying its 5G wireless network, which requires billions of dollars in investment, as well as expanding its fiber optic footprint.

The carrier has boosted film and television production to attract subscribers to its HBO Max streaming service. He also needs cash to pay off his debt. AT&T has become one of the most indebted companies in the world after a frenzy of acquisitions, and although it has repaid what it owes, it now has bills from a recent spectrum auction.

AT&T was the second highest bidder in the Federal Communications Commission wave sale, committing $ 23 billion. Verizon, the top bidder, agreed to pay $ 45 billion.

Any move involving AT & T’s content assets would come just months after an agreement was reached to split its DirecTV operations into a pact with buyout company TPG. AT&T also agreed in December to sell its Crunchyroll anime video unit to a Sony Corp unit. for $ 1.2 billion.

And the company has separated from its phone operations in Puerto Rico, a stake in Hulu, a central European media group, and almost all of its offices in Hudson Yards in New York City.

Stankey’s predecessor at AT&T, longtime CEO Randall Stephenson, spent his 13 years strengthening the company. He was obsessed with transactions and kept a list of color-coded companies he wanted to buy through AT&T, which led 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. And now that’s exactly what Stankey is doing.

In wireless services, AT&T is catching up with Verizon, the market leader, and T-Mobile US Inc., which has become the number two operator after gobbling up Sprint Corp. Verizon has made its own efforts to slim down. The company agreed this month to sell its media division to Apollo Global Management Inc. for $ 5 billion, a move that will offload online brands like AOL and Yahoo.

The Discovery deal could give the combined company enough programming to compete with Netflix and other streaming services in a global battle for the future of entertainment. In 2019, Disney bought the entertainment assets of 21st Century Fox Inc. for $ 71 billion, largely to gain enough strength to constantly refresh its streaming services. It launched Disney + in November 2019 and already has over 100 million subscribers.

Discovery and AT & T’s multimedia unit, WarnerMedia, have recently made their own forays into streaming. Discovery has launched Discovery +, which offers a wide range of unscripted reality shows. AT&T, meanwhile, made a big bet on HBO Max, which launched a year ago and includes HBO programming and movies from the Warner Bros. studio. from AT&T. Both companies are rapidly expanding their streaming services around the world.

Wired networks

Discovery and WarnerMedia also have a portfolio of cable channels that remain profitable but lose subscribers as more people abandon pay-TV service and embrace streaming. And AT&T CNN is looking for new ways to maintain its audience after the busy news cycle of the Trump years. TNT and TBS have general entertainment programming, but their most interesting assets may be their sports rights to professional baseball, basketball and air hockey. Discovery, meanwhile, has the right to broadcast the Olympics and professional golf outside of the United States.

The combination of these assets would be complex, as the two companies have entered into numerous long-term agreements with pay television companies. A merged company would also have to choose a leader between WarnerMedia CEO Jason Kilar and Discovery’s Zaslav.

The deal would be recognition by AT&T that it has broken its promise to own distribution and media assets. The strategy has already been criticized, with analysts suggesting the two could be more useful if they were separated.

‘Fool’s Gold’

Rich Greenfield, an analyst at LightShed Partners, argued that AT&T and Comcast Corp., the cable operator that owns NBCUniversal, should divest their media assets and combine them into a new company. He called the promise of owning distribution and programming “fool’s gold”.

On Sunday, Greenfield tweeted that he could “certainly imagine Turner’s declining secular assets merged with Discovery on a larger scale,” but added that it was “harder to imagine” HBO Max and the Warner Bros studio AT&T as part of a combined company.

At an investor conference last week, WarnerMedia’s Kilar defended the need for WarnerMedia to be owned by AT&T, saying the telecommunications company had invested billions of dollars in HBO Max and shattered the silos within the company to create a single operational unit. He added that AT&T phone and broadband customers were less likely to cancel if they got HBO Max, and that many HBO Max subscribers were AT&T customers.

Kilar angered the Hollywood establishment with his decision in December to release all WarnerMedia films on HBO Max at the same time the films hit theaters. But his recent films have performed well at the box office, helping allay concerns.

Kilar spoke about WarnerMedia’s growth strategy under AT&T in an interview with the Wall Street Journal published last week.

Now he can face a more formidable challenge: helping to piece together a patchwork of media companies to create an entity that can thrive in the age of streaming.

(Updates with the amount spent on auction in the ninth paragraph.)

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