AT&T, the wireless carrier that thundered its way into the media business three years ago with grand visions of streaming video on millions of its customers’ cellphones, wants a do-over: It has agreed to spin off its WarnerMedia group and merge it with a rival programmer, Discovery Inc., the companies announced Monday.
The 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.
The new company will join together two of the largest media businesses in the country. AT&T’s WarnerMedia group includes the sports-heavy cable networks TNT and TBS. In addition to Discovery’s strong lineup of reality-based cable channels, the company has a large international sports business.
The merger would also be a significant about-face for AT&T, a telecommunications giant better known for servicing fiber lines and cell towers than producing entertainment and courting Hollywood. Industry experts questioned AT&T’s daring $85 billion purchase of Time Warner at a time when cord-cutting was only accelerating. The spinoff indicates a failed acquisition strategy.
As part of the deal, AT&T will be able to shed some of its debt and get some cash and bonds that altogether would amount to $43 billion. AT&T shareholders will own 71 percent of the new business, with Discovery investors owning the rest.
The new company will be run by David Zaslav, 60, a media veteran and the longtime chief executive of Discovery, casting into doubt the future (yet again) of the top ranks of WarnerMedia. Jason Kilar, 50, who was hired to run AT&T’s media group only last year, could lose his job.
“Jason is a fantastic talent,” Zaslav said on a call with reporters following the announcement.
He also praised other executives within WarnerMedia, including Toby Emmerich, the head of the film division; Casey Bloys, who runs HBO; and Jeff Zucker, the leader of CNN. Zucker and Zaslav are also longtime golfing buddies.
Zaslav said he would be looking for ways to “get the best people to stay,” but he did not elaborate on his plan for the management team.
John Stankey, the head of AT&T, who appeared alongside Zaslav in the news conference via Zoom, said, “Jason remains the CEO of WarnerMedia.” He added: “David’s got decisions he’s got to make across a broad cross section of how he wants to organize the business and who will be in what roles moving forward during this transition period.”
The companies said they expected the deal, which must be approved by Discovery shareholders and regulators, to be finalized in the middle of next year. The companies anticipate they will cut annual costs by $3 billion as a result of the transaction.
The new 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 the new company ahead of Netflix and NBCUniversal and behind Walt Disney Co. as the second-largest US media company.
The deal highlights the need for even large media companies to get bigger. Traditional entertainment firms are struggling to maintain their grip on viewers as the likes of Facebook, YouTube, and TikTok continue to draw big audiences. Consolidation appears to be the quickest way to buy more eyeballs — 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 and Disney, both AT&T and Discovery have invested heavily in streaming. AT&T has spent billions building HBO Max, which now has about 20 million customers. Discovery has 15 million global streaming subscribers, most of them for 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 and is estimated to bring in $15 billion in revenue.
But the new company will also be saddled with plenty of debt at $55 billion. Zaslav emphasized that it would be generating enough cash to pay that down fairly quickly. The combined business could spend as much as $20 billion a year on developing content, he added.
The merger is a significant about-face for AT&T, a telecommunications giant that got into the media business with its Time Warner foray. Industry experts questioned AT&T’s deal, and now the spinoff indicates a failed acquisition strategy.
Stankey, the CEO of AT&T, has looked at its media business as a way to keep its phone customers from switching to other companies. AT&T Wireless subscribers get discounts and free access to HBO Max. A deal with Discovery could include stipulations that customers would maintain those benefits.
Before he took over as CEO last year, Stankey 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.