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WarnerMedia and the telecom operations of AT&T benefited each other, but the conglomerate lacks the global reach necessary to build a successful streaming business, AT&T CEO John Stankey said on Monday, a week after its entertainment arm unveiled a megadeal to merge with Discovery Inc.
Speaking during the virtual J.P. Morgan Global Technology, Media and Communications Conference, Stankey said that AT&T found that “our distribution muscle helps the media assets that we have,” arguing that “HBO Max would not be where it is today if not for the strength of the two combined companies.”
But in the streaming age “what’s become clear is that the opportunity for direct relationships with customers is truly going to be a global opportunity,” while most of AT&T’s connectivity focus is on the U.S. So AT&T concluded that it was “time to unleash the media assets” to let them go after a multi-hundred-million subscriber opportunity via the merger with Discovery, which has global reach. He called the deal “really attractive,” saying it would create synergies that can “fund this growth” with a “deeper content library.”
The two companies will merge their media and entertainment assets to bring together TV channels like CNN, TBS, TNT, HGTV, Food Network and Discovery Channel, the Warner Bros. film studio, and streaming services HBO Max and Discovery+. In unveiling the deal, they had indeed said the merger would create a “global leader in entertainment” and “a stronger competitor in global streaming.”
The new company will “compete globally in the fast-growing direct-to-consumer business, bringing compelling content to direct-to-consumer subscribers across its portfolio, including HBO Max and the recently launched Discovery+,” the companies said last week. “The transaction will combine WarnerMedia’s storied content library of popular and valuable IP with Discovery’s global footprint, trove of local-language content and deep regional expertise across more than 200 countries and territories.”
The combined company will spend $20 billion annually on content, with Stankey noting last week: “The new company will have a content spend that exceeds most of its industry peers.”
Last week, Stankey also addressed the status of WarnerMedia CEO Jason Kilar, who joined the company only a year ago and is expected to leave. “Jason is still the CEO of WarnerMedia,” Stankey said, adding that Zaslav “has a lot of decisions to make about personnel.”
Stankey wasn’t questioned about the suggestion that his company could look for a megadeal with cable giant Charter Communications.
Barron’s suggested this weekend that AT&T could buy Charter. Benchmark Company analyst Matthew Harrigan, in a report entitled “AT&T Buys Charter? Wouldn’t It Be Cool to Ride a Horse on the Moon?” wrote though that he doesn’t expect such a deal. “We remain constructive on Charter and maintain our ‘buy’ rating and $775 price target,” he said. “However, we do not attach any credence to this weekend’s Barron’s article.”
He explained: “Any transaction, even with a prohibitive level of mandated overlapping cluster dispositions, would in our view almost certainly be nixed in Washington irrespective of which party is in power.” And Harrigan added: “Furthermore, given AT&T’s merger debacles with DirecTV and Time Warner, it is unlikely that AT&T CEO John Stankey would embark on another epic acquisition.”
What about John Malone, whose Liberty Media owns a big stake in Charter? “Sans Washington’s resistance, we believe that Liberty’s John Malone is an enthusiast on mobile combinations only when they can be assimilated into near-national-reach, fixed-line networks, as in Europe,” Harrigan said.
Asked about where the recovery from the coronavirus pandemic was going, Stankey said on Monday that the firm is seeing advertising revenue returning to normal. “Our content production is now back to full swing,” he added.
The AT&T CEO also said that the Discovery deal will help the telecom giant reduce its debt and interest expense to strengthen its financial position.
Asked about his vision for AT&T over the next three years, he said it was being the best connectivity provider. Stankey disputed the suggestion, though, that he dismantled six years of acquisitions within three months, saying it was a longer process of considering, analyzing and executing deals.
Later in the conference day, Charter Communications CFO Christopher Winfrey said the WarnerMedia-Discovery deal is a “deconsolidation of vertical integration” for AT&T. He said Charter has “looked at most content assets” that have come up for sale in recent years, “and we have resisted that temptation, because we struggle to understand how, as large as Charter is, we are still a regional distributor, and the content business is a global content business.” So to benefit from a deal, “you would have to really handicap your capabilities for the content business outside of the region,” he explained. “To me [the AT&T sale of WarnerMedia] feels a little bit like a validation of the pure-play strategy we have chosen.”
Asked if he hopes that recent programming consolidation will also drive more cable and other distribution mergers, he said, “I like to hope so. I think there is a real opportunity for us to do additional cable consolidation at the right time.” But he said that most remaining cable companies are controlled by families, meaning it is not clear if and when they may come up for sale.
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