James Fontanella-Khan and Anna Nicolaou for The Financial Times:
AT&T is nearing a deal to combine its content unit WarnerMedia with rival Discovery to create a media giant with an enterprise value of $150bn, just a few years after acquiring the owner of CNN, HBO and Warner Bros, said people briefed about the matter.
First thought: wow, massive deal. Second thought: of course, it was inevitable. Third thought: wait, $150B? This is weird because:
The structure of the deal remains unclear but AT&T, which has a market value of about $230bn, is expected to control most of the combined entity. Discovery has a market value of $24bn.
In other words, if this report is accurate, AT&T is not buying Discovery outright, but instead would spin-out WarnerMedia and merge it with Discovery (while maintaining majority control of the new entity). Perhaps this is to avoid regulatory scrutiny, especially just a few years removed from the $85B Time Warner deal. But perhaps it’s also an opportune time to do this as the entity is clearly going to have to spend a ton to compete with Netflix, Disney, Amazon, Apple, and the like. How long will AT&T shareholders put up with that?
And it’s obviously that competition which is the key here. Both AT&T’s HBO Max and Discovery’s Discovery+ are doing pretty well. But it’s relative. They’re still nowhere near the size of Netflix or Disney+. Nor does either have the spending and loss-leader abilities of Amazon and Apple. The combination should take them to a 25M-35M base and perhaps that gives Wall Street enough confidence to allow them to spend like crazy to work towards becoming one of those five or six main players in streaming when the dust settles.¹
Begun, the streaming consolidation has. Who will be next? AMC? Peacock?
¹ I also think this is a savvy move by AT&T since Discovery+ is actually differentiated content with the home/food/travel focus.
