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In a deal with Discovery hatched in secret, AT&T sheds its media business

  • ASSOCIATED PRESS
                                People passed an AT&T store, in Oct. 2014, in New York’s Times Square. AT&T will combine its media operations that include CNN HBO, TNT and TBS in a $43 billion deal with Discovery, the owner of lifestyle networks including the Food Network and HGTV.

    ASSOCIATED PRESS

    People passed an AT&T store, in Oct. 2014, in New York’s Times Square. AT&T will combine its media operations that include CNN HBO, TNT and TBS in a $43 billion deal with Discovery, the owner of lifestyle networks including the Food Network and HGTV.

Just three years after it thundered into Hollywood with grand visions of streaming video on millions of its customers’ cellphones, AT&T is making a stunning retreat with plans to spin off WarnerMedia and merge it with Discovery.

The blockbuster deal, announced today, will put CNN and the HBO hit “Succession” in the same corporate family as the reality television shows “Flip or Flop” and “90 Day Fiancé.” It will create the second-biggest media company in the country, by revenue, with a sprawling business that touches on streaming entertainment, movies, sports and cable news. The merged company, which could have a value above $100 billion, would rival behemoths like Disney, the biggest media company, as well as Netflix, the leader in streaming.

For the debt-saddled AT&T, the spinoff is an about-face from its $85 billion purchase of Time Warner in 2018. Industry analysts had questioned the acquisition, citing the continued acceleration of cord-cutting. AT&T fought for the deal despite vocal opposition from President Donald Trump, whose Justice Department unsuccessfully tried to block it.

The new transaction will combine HBO, Warner Bros. studios, CNN and several other cable networks with a host of reality-based cable channels from Discovery, including Oprah Winfrey’s OWN, HGTV, the Food Network and Animal Planet.

With such a large menu of cable networks — most of which are highly profitable — the company can build a cash hoard to fuel the newer streaming business, which still loses money and needs time to gain enough customers to become profitable.

For consumers, this could mean even more shows to watch. But it’s unclear what it would mean for streaming subscription prices or traditional cable bills. WarnerMedia’s channels such as CNN and TNT and Discovery’s networks benefit from automatic rate increases paid by cable and satellite operators. Having more channels could give the new company even more leverage when negotiating those rates.

Sports is another key component of the merger. WarnerMedia includes the sports-heavy cable networks TNT and TBS and Discovery has a large international sports business.

“I believe we’re going to be the best media company in the world with an ability to reach everyone in the world because our stories play well everywhere in the world,” David Zaslav, the chief executive of Discovery, who will oversee the new company, said in an interview.

The deal represents another failed moment in the long history of corporate outsiders trying to remake the entertainment business. With few exceptions, those escapades — from General Electric’s ownership of NBC to Gulf and Western’s control of Paramount Pictures — ended badly.

As part of the deal, AT&T will get cash and bonds that would amount to $43 billion, allowing it to shed some debt. It can now refocus on its wireless business, which has been battered as customers keep switching from one rival service to another. The costly expansion of 5G technology has also strained the company’s balance sheet. AT&T shareholders will own 71% of the new business, with Discovery investors owning the rest.

Placing Zaslav, 61, a media veteran and the longtime chief executive of Discovery, in charge means Jason Kilar, 50, who was hired to run AT&T’s media group only last year, is most likely on his way out. Kilar, a streaming pioneer who was Hulu’s first chief executive, was kept in the dark about the deal until a few days ago. He has hired a legal team to negotiate his departure, according to two people familiar with the matter.

The deal could finally give Zaslav the size and scale he has long sought. A garrulous executive who can recall ratings figures off the top of his head, Zaslav represents the last of the old guard in media, a hobnobbing mogul known for hosting lavish get-togethers at his house in the Hamptons.

The deal came together quickly. Zaslav expected to meet with AT&T’s chief executive, John Stankey, at the Pebble Beach Pro-Am golf tournament in February, but both had stayed home because of the pandemic. Instead, Zaslav sent an email to Stankey as he was watching the golf tournament on TV to discuss a possible deal.

“You around?” Zaslav said he wrote to Stankey. “I have an idea.” He added some flair to his signoff with several golfing emojis and a smiley face wearing sunglasses.

Zaslav said the note kicked off a conversation that lasted several hours. Later, the two met several times “secretly from my brownstone in Greenwich Village,” Zaslav said.

“We wanted to be together and lay things out and see whether what we were thinking could really work,” he said.

In a call with the news media, Zaslav praised other executives within WarnerMedia, including Toby Emmerich, the head of the film division, Casey Bloys, who oversees content at HBO and HBO Max, and Jeff Zucker, the leader of CNN. Zucker and Zaslav are also longtime golfing buddies.

Zaslav said he would look for ways to “get the best people to stay,” but he didn’t elaborate on his plan for the management team.

The companies said they expected the deal, which must be approved by shareholders and regulators, to be completed in the middle of next year. They anticipate annual costs can be cut by $3 billion, a move that usually entails layoffs.

For AT&T, the deal allows it to go back to being a purely telecommunications business and shed some of its nearly $170 billion in debt. Investors seemed lukewarm on the news, sending AT&T shares down 2.7%. The company announced a dividend cut that would nearly halve the annual payout.

AT&T needs the extra cash to compete with Verizon and T-Mobile. The entire wireless industry is racing to claim the fastest speeds with products that could rival cable companies for broadband service. If successful, the wireless giants could take internet customers away from cable.

The new media company will be bigger than Netflix or NBCUniversal. Together, WarnerMedia and Discovery generated more than $41 billion in sales last year, with an operating profit topping $10 billion. Such a sum would have put it ahead of Netflix and NBCUniversal and behind the Walt Disney Co. as the second-largest media company in the United States.

Traditional entertainment companies are struggling to keep viewers as the likes of Facebook, YouTube and TikTok draw big audiences. Consolidation appears to be the quickest way to buy more eyeballs, and the deal could set off another round of media mergers. ViacomCBS, the smallest of the major entertainment conglomerates, is often seen as a possible target.

To compete with Netflix (208 million subscribers) and Disney (104 million customers for Disney+), both AT&T and Discovery have invested heavily in streaming. AT&T has spent billions building HBO Max, which together with regular HBO now has about 44 million customers. Discovery has 15 million global streaming subscribers, most from its Discovery+ app.

The new company expects to generate $52 billion in sales and $14 billion in pretax profit by 2023. Streaming will be a big driver of that growth, with an estimated $15 billion in revenue.

But the new company will also have $58 billion in debt. Zaslav emphasized that it would be generating enough cash to pay that down fairly quickly. The combined business will spend more than $20 billion a year on developing content, he added.

Stankey had viewed AT&T’s media business as a way to hang onto phone customers. Before he took over as chief executive last year, he was the company’s chief mergers strategist. But his track record has been spotty. In addition to planning AT&T’s purchase of Time Warner, he was behind the company’s $48 billion acquisition of the satellite operator DirecTV in 2015. The service has been bleeding customers for years; in February, AT&T sold part of the business to the private equity firm TPG for about $16 billion, a third of what it originally paid.

Stankey hit an elegiac note in a memo to WarnerMedia employees on this morning.

“I will admit that I am personally disappointed and sad that I will not have the opportunity to continue this journey with you, but I am incredibly optimistic and enthusiastic about the future of the combined WarnerMedia and Discovery,” he wrote.

When asked at a news conference if there was any piece of the new business that he would consider selling, Zaslav was emphatic: “We want it all. We want to keep it all.”

Zaslav also praised CNN, saying “everyone wakes up and wants to know, what’s going on in their world. And nobody does that better than CNN. I’ve been glued to CNN for the last several months.”

Zaslav talked up the movie and television-making machine that Warner Bros. and HBO have created, saying, “Success is about creative talent — in front of the screen, and behind the screen, and fighting and fighting to create a culture that supports that creative vision.”

Several Wall Street analysts lauded the deal, and one suggested there might yet be a fight for some of these assets.

“One is left wondering whether there is more of the story yet to come,” Craig Moffett, co-founder of the Wall Street research firm MoffettNathanson, wrote in a note this morning. “What now for Comcast, for example?”

The cable giant is unlikely to make a play for CNN or the Warner Bros. studio, “but one could argue that HBO is a must-have,” he said. “There are potential other parties who may feel the same.”

In an interview, Stankey denied that HBO was in play. “I think that David bought it,” he said, prompting laughter from both men.

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