AT&T and Discovery Combine Media Assets in Content Mega-Deal

AT&T has agreed to spin off its Warner Media division in a mega-deal with Discovery Inc., which would reshape the media industry. It was less than three years ago that AT&T shelled out $85 billion to acquire those media assets, which include CNN, HBO, Cartoon Network, TBS and TNT, through its purchase of Time Warner.

Under the terms of the agreement, which is being structured as a Reverse Morris Trust, AT&T said it would receive an aggregate amount of $43 billion in a combination of cash, debt and WarnerMedia’s retention of certain debt. The deal would create a new business, separate from AT&T, that could be valued at as much as $150 billion including debt. David Zaslav, the current chief executive officer of Discovery will be appointed as CEO of the combined company. 

News + Reality + Cartoons

The idea behind the merger is to combine Discovery’s reality-TV empire  that includes HGTV, Food Network and Animal Planet, with AT&T’s media holdings, and have enough scale to take on Netflix and Disney in the streaming wars. It would also offer AT&T the opportunity to offload more of its underperforming assets and focus more on rolling out it 5G network, where it is in an intense battle with Verizon for market share. AT&T already reached a deal to sell off part of its stake in DirecTV to a private equity firm in March.

In an interview with CNBC, AT&T CEO John Stankey and Discovery CEO Zaslav said the two companies already spend a combined $20 billion per year on content, putting them in the same realm as Netflix, which spends about $17 billion on content per year. Zaslav said he has a goal for his new company to reach up to 400 million streaming subscribers across the world, up from the 100 million subscribers the two separate companies have today.

The Great Unbundling

Phone companies spent 2015 to 2018 acquiring media assets as video streaming became more ubiquitous and companies like Netflix added tens of millions of subscribers every year. Verizon and AT&T wanted to take advantage of their reach into their vast customer bases and offer them content as well as connectivity. That dream pushed them to spend tens of billions of dollars, as Verizon bought AOL and Yahoo, and AT&T bought Time Warner and its heavy debt load. 

What these phone companies didn't see was that their consumers really didn't care if they owned those media assets or not - they would get their content anywhere they wanted, even a la carte. Owning these media assets became burdensome for the carriers, and slowed their growth. Verizon sold off AOL and Yahoo back in April for $5 billion, and now it appears AT&T will offload Warner Media.