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AT&T Exploring Combination Of Media Assets With Discovery

·5 min read

AT&T and Discovery are pursuing a merger of their entertainment assets that would reshape the media business, particularly the fast-growing realm of streaming.

A person familiar with the situation confirmed to Deadline that talks have been ongoing. The configuration is said to be a joint venture, with details still being finalized. WarnerMedia had already been talking with NBCUniversal about a similar arrangement in recent months, though those discussions have not borne fruit.

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Bloomberg, citing unidentified sources, had the first report on the combination, indicating that a deal could be announced as soon as this week. The Financial Times also said word on a transaction is likely this week, adding that AT&T’s board is meeting today to vote on the deal.

Reps from Discovery and AT&T declined to comment when contacted by Deadline.

Plenty of uncertainty remains as to how the assets would be combined, and the person familiar with the discussions said they were not guaranteed to lead to a deal. Discovery brings a raft of well-established networks like HGTV, Food Network, TLC and Discovery. AT&T, through its WarnerMedia division, has HBO, Warner Bros and Turner networks CNN, TNT, TBS and several others. On the traditional cable side, the concentration of so many similar assets would almost certainly face regulatory scrutiny.

The executive suite of the combined entity would be crowded, and that structure is said to be another area of flux. Discovery is led by the hard-charging David Zaslav, a onetime top sales exec at NBC who has steered Discovery to global growth. Jason Kilar, the founding CEO of Hulu and a former Amazon exec, arrived as WarnerMedia a year ago. He has made a number of aggressive moves and dramatically restructured the company to help position it to face the digital future.

Both companies have recently joined the streaming fray in significant ways. WarnerMedia launched HBO Max in May 2020. Discovery rolled out Discovery+ in January in the U.S. and soon started expanding it globally. Next month, HBO Max will go global and also introduce a cheaper, ad-supported tier. Advertising is a key element to Discovery’s offering, though it also has an ad-free option.

The new entity would have, based on pro forma numbers from 2020, total revenue of $40 billion. Its $12 billion in advertising revenue and $12 billion in spending on programming would rank it in the top echelon in both categories.

Bundling, which has already begun at companies like Disney and is widely seen as inevitable in the cutthroat streaming sector, could well be an option in a combined entity. Discovery+ focuses entirely on unscripted programming. HBO Max has played in that realm to some degree, but scripted fare remains its bread and butter.

After major stumbles in the months after it launched, HBO Max has gained traction of late, adding 2.7 million subscribers in the first quarter to reach 44.2 million in combination with linear HBO. Executives have credited Warner Bros films premiering on HBO Max at the same time they reach theaters, as well as buzzy HBO shows like The Undoing and Max Originals like The Flight Attendant.

The Warner Bros film operation under Toby Emmerich has made steady progress during a time of industry upheaval and the headlong rush into streaming. Films on the studio’s slate, including Godzilla vs. Kong and Mortal Kombat have managed to pull in sizable box office while also enticing HBO Max subscribers. GvK has taken in almost $100 million in the U.S. and more than $400 million worldwide despite theaters in many regions still being shuttered, along with 40% of North America.

The report is hitting as both companies prepare to deliver high-stakes pitches to advertisers during the annual week of upfront presentations. This year’s upfronts will be virtual due to Covid-19 safety considerations. Discovery’s presentation is on Tuesday and WarnerMedia’s is Wednesday.

A deal would be a major surprise for AT&T, which has made a number of moves in the past three years to chip away at the sizable debt it piled up from the acquisition of Time Warner. That $81 billion deal, which closed in 2018 after a federal antitrust trial, was followed by the shedding of a number of assets. Net debt for AT&T stood at $169 billion as of the end of the first quarter in March, despite divestitures ranging from a 10% stake in Hulu to the new corporate headquarters building in Manhattan to anime brand Crunchyroll. The company estimates debt will decline to $154 billion by the end of 2021.

AT&T in February took a big step toward moving the lagging satellite pay-TV operator DirecTV off its balance sheet, selling 30% of it to private equity firm TPG. The spinout valued the enterprise at $16.25 billion, a steep discount from the $49 billion AT&T paid to acquire DirecTV in 2015. Just prior to the TPG transaction, the company announced a $15.5 billion writedown on the DirecTV assets.

Given that AT&T makes more than 80% of its total revenue in the thriving area of wireless and broadband, with significant investments in 5G technology designed to keep things humming, entertainment has long been an uncertain fit. The Time Warner and DirecTV deals were engineered by Randall Stephenson, who departed AT&T as CEO last year. Successor John Stankey is an AT&T lifer who has repeatedly articulated the virtue of marrying wireless assets with film and TV, but the execution of that has not bowled over investors. AT&T stock has been locked in a narrow range around $30 a share for the past two years as media rivals, especially Disney, have seen their stocks prosper due to Wall Street enthusiasm about their progress in streaming.

Discovery absorbed Scripps Networks Interactive in a $14.6 billion transaction that closed in 2018. After the combined company managed through a period when all cable programmers saw viewership and advertising decline, it shifted to direct-to-consumer streaming this year. Last month, the company said it had reached 13 million subscribers, but the expense of rolling it out took a toll on first-quarter income.

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