WarnerMedia and NBCUniversal Should Be Merged, Analyst Argues

HBO Max WarnerMedia Investor Day Presentation
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Will this vision actually become reality? "We doubt it," writes LightShedPartners analyst Richard Greenfield. 

"It is time for both AT&T and Comcast to abandon the fool’s gold of vertical integration of content and distribution and merge NBCUniversal with WarnerMedia," LightShedPartners analyst Richard Greenfield argued on Thursday.

"In today’s media world, we believe focused scale is the only way to be both large enough and nimble enough to embrace technological change and carve a meaningful space in a tech platform-dominated landscape," he explained in a report. "Abandoning grandiose plans and empire-building is a tough psychological hump to overcome. However, it would be a wildly accretive outcome for investors. It is easy to say that we can do this in two years, five years, etc. Yet, we believe times is of the essence, as legacy media assets have entered secular decline and technology is rapidly changing consumer behavior; if you wait too long to build scale and go all-in, it might end up being too late."

Greenfield highlighted that "we have always questioned the logic of vertical integration of content and distribution in media," and "history has supported our skepticism." He pointed to the AOL Time Warner experiment that "created a lot of investment banking fees, but destroyed shareholder value." Similarly, Time Warner was "not helped by owning Time Warner Cable, nor did News Corp benefit from its ownership of DirecTV," he added.

There are two such vertically integrated media giants left in Comcast's NBCUniversal and AT&T's WarnerMedia. "Comcast was able to buy NBCUniversal at an amazing price and benefit from running and investing in the businesses far better than GE did, creating substantial value for Comcast investors along the way," Greenfield said. "However, those gains were realized years ago, and it is hard to invent strategic rationale for their continued existence under the same roof, with all due respect to Peacock."

And he said that while it was "too early to judge AT&T’s acquisition of Time Warner and their hopes for HBO Max, we have viewed the transaction as far more about diversification than vertically-integrated value creation from day one."

The analyst argued that scale, not vertical integration is needed in Hollywood these days, and NBCU and WarnerMedia would form a $80 billion-plus revenue behemoth. "When we think about the scale needed to compete in a direct-to-consumer world, it goes well beyond the content heft," he said. "Think of the scale of engineering resources, the marketing heft of the combined entity and infusing theme parks into Warner Bros. and video games into NBCUniversal. Not to mention, at this enlarged scale, the combined company is in a far better position to negotiate with TV operating system platforms, [pay TV and virtual pay TV distributors], and even talent."

The Wall Street expert in his report assumed that NBC and Telemundo owned-and-operated local TV stations would be sold or spun off, "thereby eliminating the need for FCC approval." He argued that private equity buyers would be interested in these assets.

Greenfield also touted the CEOs of the two entertainment arms, NBCU's Jeff Shell and WarnerMedia's Jason Kilar, and their skills. "While we are sure both executives would want to run the combined company, we suspect shared power would be ideal for shareholders as they each bring very different skill sets and backgrounds in media and technology," he said. "Both executives recognize the need for disrupting the status quo and do not appear afraid to 'break glass' as we have seen with theatrical windows in recent weeks. In many ways, the leadership duo would be a dream team executive-wise."

But will his vision actually become reality? "We doubt it," argued Greenfield. "Both AT&T and Comcast feel far too focused on their current strategies to deal with a massively disruptive and transformative merger of equals that creates a new separate entity, not to mention a sizable divestiture of local TV stations. That said, it would be a huge win for investors on both sides and could create one of the only companies positioned to not just survive long-term, but to flourish as the entire media business shifts rapidly to streaming."