Telecommunications giant AT&T is in talks to merge its WarnerMedia with Discovery to create a new stand-alone media company. The deal is rumored to be announced on Monday.
Wall Street may expect news of a major global media merger Monday – WarnerMedia, owned by AT&T (T), is rumored to be in merger talks with Discovery (DISCA).
The merger will create a new company separate from AT&T, which could be valued at $ 150 billion, including debt, according to the Financial Times.
Media sources warn that the deal between WarnerMedia and Discovery is not final and negotiations may still fall apart. The companies themselves did not comment on the news.
Most market analysts agree that such a deal could benefit both companies in the long run.
In today’s global media space, dominated by streaming services from Netflix (NFLX) and newcomer Disney + (DIS), it is difficult to compete and traditional cable networks are becoming a thing of the past. For more information on the complexities of competition, see Marketinfo.pro’s AT&T Loss of Competition with Streaming Video Services.
Discovery owns channels such as HGTV, Food Network, TLC, Animal Planet and Discovery Channel, which reach 88.3 million US users. The streaming service Discovery +, launched in January, has 15 million subscribers.
AT&T, in addition to its core business of cellular and internet networks, has a major media business, which includes:
WarnerMedia – The company formerly known as Time Warner was acquired by AT&T for $ 85 billion in 2018. The WarnerMedia division includes channels such as CNN, HBO, Cartoon Network, TBS and TNT.
film studio Warner Bros.
The streaming services HBO and HBO Max now have 63.9 million subscribers worldwide, compared with over 100 million for Disney + and 207.6 million for Netflix.
WarnerMedia and Discovery deal – ruin AT&T’s media business?
The suggestion that AT&T’s core media assets could be merged with Discovery and spun off into a separate company suggests that AT&T will lose its ambition to become a major media player.
Rather than keeping the cellular and media business under the same roof, AT&T’s media companies will be spun off, but shareholders will have a stake in the new company that will emerge from the merger with Discovery.
For 13 years, AT&T has acquired television channels, video services and film studios (43 acquisitions in total), aiming to become a major media holding. However, the merger was difficult, and the directors of many of the acquired media companies refused to work under the guidance of cellular specialists.
In addition, due to numerous acquisitions, AT&T has accumulated huge debts, estimated at $ 180 billion as of March 31, 2021. At the same time, the media business constantly requires huge investments in content: in 2020, AT&T allocated about $ 2 billion in investments for the HBO and HBO Max video streaming business.
In 2020, AT&T faced great financial difficulties:
First, the company made huge investments in assets for its 5G networks, acquiring a spectrum license for $ 23 billion.
Second, the COVID-19 pandemic has halted content filmmaking and AT&T’s media business is facing increased competition.
Market analysts’ opinion
Some analysts were not surprised by the news of a possible WarnerMedia spin-off given a number of previous sales by AT&T, which is seeking to reduce debt and optimize its business.
In February of this year, AT&T agreed to sell minority stakes (the largest stakes) of its companies DirecTV, TV Now and U-Verse for $ 15 billion to private equity firm TPG Capital.
Earlier in December, AT&T agreed to sell its Crunchyroll anime video division to Sony Corp. for $ 1.2 billion. The company also parted from its stake in Hulu, and was in talks to sell its gaming division Warner Bros.
The recent sale by Verizon (VZ) of its media assets is evidence that US telecoms companies cannot withstand strong competition in both cellular and media at the same time.
Verizon sold for $ 5 billion two of its largest digital media assets, AOL and Yahoo, to private equity firm Apollo, to offset its massive 5G spending – its $ 52.9 billion investment in government licenses.
As of the close of trading on May 14:
AT&T shares are up 12% since the beginning of 2021 and 12.8% in the past 12 months, with a market capitalization of around $ 230 billion.
Discovery shares are up 18.5% YTD, but the gains could have been huge if not for their sharp fall in March.
Below is a chart of AT&T stock (candlestick chart) and Discovery stock (line chart) from the end of 2019.
After the close of trading on Friday, AT&T shares were up 0.12%, while Discovery shares were down 0.28%.