Discovery is bringing on former top Disney executive and his “old friend” Kevin Mayer to consult on the future of streaming at the company as it moves closer to its planned merger with WarnerMedia, CEO David Zaslav said Wednesday.
He said Mayer has committed to bringing his expertise on windowing and packaging and the like, acquired during his experience launching Disney+, to the company, which will help the team fine tune its direct-to-consumer strategy. “Kevin has a big brain,” Zaslav said, joking about how the executive is busy with various jobs, including as chairman of sports streamer DAZN. “He’s super excited about getting in the car with us.”
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Zaslav also made it official that Discovery CFO Gunnar Wiedenfels will serve as CFO of the merged Warner Bros. Discovery.
Zaslav said on Discovery’s third-quarter earnings conference call that the merger partners were “well on track for a mid-2022 close” of the megadeal, while he and Wiedenfels said the combined firm’s debt burden would be lower than originally expected, making the executive team even more optimistic about their ability to quickly reduce the post-merger debt load.
Zaslav told analysts that based on latest “operational and strategic diligence,” providing more insight into AT&T’s financial trends, his team now expects debt leverage of or below 4.5x upon the merger close, rather than the originally expected 5x. The promised reduction of that to 3x could therefore happen “meaningfully sooner than what we articulated in May,” he added. Back then, management said this would be achievable about two years after the deal close.
Wiedenfels explained that a working capital adjustment related to the $43 billion that AT&T will get in the deal could as of now come in $4 billion to $5 billion lower than forecast in May, while Discovery’s free cash flow momentum was also better than expected. Said Wiedenfels: “We are just doing a lot better” than previously anticipated. He also noted a “very significantly increased confidence that I have in our ability to very quickly de-lever … and to very quickly get us into the long-term comfortable leverage target range.”
Wells Fargo analyst Steven Cahall in a first reaction noted that Discovery’s third-quarter free cash flow of $705 million was more than $100 million ahead of his and Wall Street estimates. “We think free cash flow generation is under a particular microscope right now as investors worry about leverage for the WarnerMedia deal,” he wrote before the company provided its update on the call. “We suspect Discovery is on a mission to drive as much free cash flow as possible into the deal to create some deleveraging headroom.”
The Discovery team on Wednesday again pointed to the successful integration and debt reduction following Discovery’s 2018 acquisition of Scripps Networks Interactive.
Zaslav also shared “broad strokes around what underpins our confidence and enthusiasm in our global go-to-market attack plan” for the merged firm, led by its strong content. With programming from news and sports to kids/family offerings, drama, comedy and unscripted, plus a shared “culture of creative excellence,” he said the merged company would have “the most complete and balanced portfolio offered in one service in the world.” And investments in building on both firms’ track records will make “our service uniquely global and local at the same time,” Zaslav added. “I think we have the best menu” of content, he concluded.
The total addressable streaming market for the merged firm should therefore be “on par with the biggest streaming service,” a reference to Netflix, according to Zaslav. He also shared that fewer than half of Discovery+ subscribers in the U.S. are also believed to be HBO Max customers, “which with the right packaging provides a real opportunity to broaden the base of our combined offering,” he said.
And Zaslav emphasized his team spirit, sharing that Discovery was rooting for strong results at Warner Bros., HBO and the rest of WarnerMedia. “We are cheering them on with the success of Dune around the world … and [HBO and HBO Max chief content officer] Casey Bloys [is] having an incredible run of success with Succession and White Lotus and Hacks and Mare of Easttown.”
