The media industry’s enthusiasm for vertical integration seems to be in its dying throes, as Monday’s announcement that AT&T plans to spin off its WarnerMedia unit and merge it with Discovery Inc. suggests that the telco couldn’t forge a path forward with its 2018 acquisition.
A mashup of WarnerMedia’s Turner Sports assets with Discovery’s suite of cable channels doesn’t seem to have any immediate implications for the U.S. sports-media market. But as owner of Eurosport and the continent’s exclusive broadcaster of the Olympics, Discovery is a force to be reckoned with overseas.
The transaction isn’t expected to close before mid-2022 (upon satisfaction of the standard regulatory approvals and a collective thumbs up from Discovery shareholders), but the deal is already being seen as a game-changer on the streaming front. As Bruin Sports Capital founder George Pyne noted earlier this morning: “This deal has profound implications on the sports industry. The new entity can invest in adding more global sports rights to its NHL, NBA, MLB, PGA Tour and NCAA [Division I Men’s Basketball] Tournament content and create a must-have sports streaming service.”
Naturally, any effort to relocate WarnerMedia’s sports-media holdings to a Discovery-branded over-the-top service is a negotiation that will have to be conducted with each of the respective partner leagues. But the prospect of developing a standalone streaming service to house the domestic Turner Sports properties as well as Discovery’s overseas holdings would seem to be a winner, especially in light of the fact that Warner’s OTT offering, HBO Max, may be blended with Discovery+. (What with the relative lack of sports programming on the post-boxing HBO, the premium cable brand arguably was never such a great fit for Turner Sports’ hoops and hockey content.)
Also weighing in on the proposed merger were MoffettNathanson analysts Craig Moffett and Michael Nathanson. In a note to investors, the two Wall St. observers said the WarnerMedia-Discovery marriage will create a TV monolith, one that will be the beneficiary of nearly one-quarter (24%) of all U.S. advertising dollars. MoffettNathanson went on to forecast that Discovery will shift “key Turner sports and news content to Discovery+, to make it a broader and more attractive offering.”
The view from across the pond was just as enthusiastic. “With the news that AT&T and Discovery are to merge, the landscape for sports media rights and sports broadcasting in the largest media rights market on earth is changing significantly,” said Conrad Wiacek, head of sports analysis at the London-based data and analytics firm Global data. “With sports content at the forefront of the OTT revolution, Discovery and AT&T merging now will create a new ecosystem for sports, such as esports, to gain a foothold in the US.”
As mapped out this morning by Discovery president and CEO David Zaslav and AT&T chief John Stankey, the deal would allow the telco to unburden itself of some of its massive debt while generating some $43 billion. AT&T investors look to own 71 percent of the new company, with the remaining portion going to Discovery shareholders.
Much of the morning’s presentation was focused on the WarnerMedia TV assets and Discovery’s collection of nonfiction channels, which includes Discovery Channel, HGTV, TLC and Food Network. That said, Zaslav made sure to underscore the value of the new venture’s sports holdings, saying that sports is one of the “true differentiators of the future.”
Both boards of directors have approved the transaction, which would create the country’s second-largest media entity behind Disney. Discovery’s market value is $16.6 billion, while AT&T, which generates the vast majority of its revenues via its tent-pole communications business and is on the hook for some $160 billion in debt, boasts a value of $230.2 billion.
As is always the case when two large companies come together, there is a human cost. According to a joint statement released this morning by AT&T and Discovery, the tie-up will create “$3 billion in expected [annual] cost synergies,” which is to say that many of the WarnerMedia employees who have weathered the head-cutting of the last three years are in for more uncertainty in light of this proposal.
AT&T’s decision to throw in the towel on its media aspirations comes just three years after the company was given the green light to acquire the Time Warner assets in a $108.7 billion deal.
Zaslav will spearhead the new company, the official name of which will be released later this week. The hybrid in 2023 is expected to scare up some $52 billion in sales and $14 billion in adjusted EBITDA.