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It’s hard to imagine a cash crunch involving mega meta AT&T, but that’s exactly what was going on at WarnerMedia in 2020 and 2021. The crunch required adjustments to be made to HBO Max planning, and the big question that had been asked since AT&T had taken over in 2018 — whether its streaming service would be able to compete directly with Netflix or be a smaller, and thus not direct competitor — seemed to be on the verge of being answered. Netflix was spending $19 billion on programming, HBO Max, $7 billion. And that was before cash became (relatively) scarce. Once the crunch came, there were two parallel tracks inside WarnerMedia for the future — one if new money arrived; the other, which was shorter and much less ambitious, if there wasn’t a significant influx of new monies.
HBO, which lived under the HBO Max rubric, wasn’t affected as much. The big jump in its programming hours had occurred post-Game of Thrones, from about 100 hours of scripted programming to 150 hours, and post-pandemic it was looking like 185 hours, the most in HBO history.
So when on Sunday, May 16, 2021, news leaked that AT&T would spin off WarnerMedia to merge it with Discovery, HBO and WarnerMedia executives weren’t surprised, as in, “Yeah, so the cash crunch wasn’t fake after all.”
John Stankey called selected senior executives on Sunday to tell them this thing was for real, and they in turn contacted their teams to tell them to hold on. It was going to be a bumpy ride. Once again.
The deal called for AT&T to receive a combination of cash and bonds worth $43 billion and its shareholders to own 71 percent of the new company (the other 29 percent to be retained by Discovery’s shareholders). David Zaslav — who’d been Discovery’s CEO since moving there from the legal department of NBC’s cable division in January 2007 — was announced as the leader of the new organization after the merger. AT&T and Discovery said they expected to complete the deal by mid-2022; it would create one of the largest media companies in America, second only to Disney, and would join AT&T’s most prominent media assets — HBO, the Turner networks including CNN and movie studio Warner Bros. — to Discovery’s Animal Planet, Food Network and OWN, the Oprah Winfrey Network.
Both companies offer streaming services (HBO Max and Discovery+), with HBO, combined with traditional cable, boasting roughly 44 million domestic subscribers to Discovery’s 15 million global count.
Talks between the companies were initiated by an email Zaslav sent Saturday, Feb. 13, 2021, to AT&T CEO John Stankey. Because of the coronavirus, both had forgone their trips to the AT&T Pebble Beach Pro-Am, where Zaslav had wanted to speak with Stankey, although Zaslav had watched parts of the golf tournament from home. He texted Stankey, “I’ve been thinking,” and, “I have an idea.” He added a few golfer emojis and a smiley face with sunglasses. Stankey replied, “Always scares me when you do that :)” and “Would you like to chat?” They ended up speaking for hours.
Stankey met with Zaslav on March 2 in Greenwich Village at a townhouse Zaslav owned. On April 1, Zaslav brought in Discovery CFO Gunnar Wiedenfels and Bruce Campbell, a Discovery strategist and top aide to Zaslav who had worked on Discovery’s previous buys of Scripps and Eurosport. Both companies also enlisted banks as counsel on the deal — AT&T used LionTree and Goldman Sachs, and Discovery used Allen & Co. and JPMorgan. Goldman Sachs and JPMorgan loaned AT&T in excess of $40 billion to finalize the deal.
Each side had a set of code words for the transaction. Discovery used baseball-related names: “Project Home Run” was the merger, “Williams” was WarnerMedia, “DiMaggio” was Discovery and “Aaron” stood for AT&T. At AT&T, Discovery became “Drake” and WarnerMedia became “Magellan.”
Stankey did not tell WarnerMedia CEO Jason Kilar about the deal until the week of May 3, a fortnight prior to the announcement. Kilar dealt with not being told sooner by hiring lawyer Allen Grubman.
On Sunday, May 16, Zaslav flew to Dallas on his way to AT&T headquarters for a decision by both companies’ boards to greenlight the deal. While Zaslav was heading to Texas, news broke through Bloomberg that the companies were planning a merger. Once Zaslav arrived, the two boards, who had gathered virtually through video conference, unanimously approved the deal, which was announced the next day. The new company would be called “Warner Bros. Discovery.”
On July 1, 2020, when I sat down in the chair being CEO, I started the process of asking myself what is this business going to look like for the next five years? What do I want, when my tenure on this job is finished, to say we were able to do? The phone call that David made was just a day in a process that had been going on for months. We were pretty far along in our deliberations about what we thought the direction of the business was. So there wasn’t lightning in a bottle. It wasn’t because David called me that day. We were in a process of looking at options and discussing them with the board and people I trust outside of the board.
It is still surreal that the deal came together. I talked to John because I felt we weren’t big enough alone, and each time we looked at what we had together, it was very complementary. It wasn’t just more, it was more that was differentiated, it was appealing to different demographics, it was more depth of content that would be more appealing for subscribers. And it was content that would reduce churn.
Because of the delay of the AT&T Time Warner transaction, plus the waiting period of the “keep separate” agreement that we had to agree to, which didn’t allow us to start the integration until six months after close, we lost about a year, maybe a little bit more. I don’t want to say that was the cause or the exclusive reason for the sale [of WarnerMedia five years later], but if we were where we are right now a year ago, would investor sentiment possibly be different? Would we have been in advance of Disney+ growing the base and demonstrating to the market the great success that we’re having right now, prior to them coming in with a lower price? I think it might’ve had an impact on things. But there were a lot of other issues for consideration beyond that.
There was no 90-degree turn when David called. If you were to be the DOJ going through all of my documents from my desk, my emails and my phones that they will be going through in the coming months, there will be nothing in there that doesn’t have an option like this well-articulated well before David ever phoned me, along with many other options and what the pros and cons of each consideration was.
All options obviously had regulatory approval considerations, capital structure considerations, impacts to employees and market effectiveness. I would say we picked a transaction that we think is the strongest from a regulatory approval dynamic. There’s very little overlap, virtually none. There is no market concentration in any way, shape or form. So, by definition, that improves the prospects of the deal.
Both of us are real competitors. We’re going to fight as hard as we can to will ourselves to success. If we’re successful, and I believe we will be, there will be Harvard Business School case studies on this deal. John had the courage to say, “If I have a chance to be stronger and create more shareholder value with Discovery and with Dave, I’m going to do it, and we are going to be the leading global IP media company.” History will say this was a brilliant strategic move.
I believed that the business needed to look at vertical integration and, frankly, I still believe that. If you ask me five years from now, even in this configuration of what we’re going to do, does the communications company and the connectivity business need to come up with a way to ensure that we can differentiate the product beyond simply selling speed and be successful for the long term, I still believe that is necessary. We’ve got Amazon in the satellite business becoming a global communications provider now. We shouldn’t all think that’s the last act. One of the jobs I need to do in carrying AT&T forward is ensuring we come up with a strategy that the investor base will tolerate and work through and give us the right credit for.
What changed from the time of close? It’s this dynamic of the capital base not recognizing the value of what we created in the media company by making the hard moves we made, good progress, strong work by Jason. They refused to give us credit for that progress. We also needed a full push into global deployment. That weighed heavily on me.
We were pitched many ideas by a lot of bankers over the years, probably a thousand times, but no one ever pitched this deal. I said to John in our first conversation, “This combination doesn’t just make us better together, it makes us the best media company in the world.”
When I was a kid, I went to camp, and the girl’s side of the camp was on the other side of the lake. Here’s the analogy: Netflix had been so successful, they’ve already gotten to the other side of the lake and built a cabin. Disney’s a formidable company, and none of us expected they would be impactful so fast, and they’re on the other side too. I said to John, “Each of us are in the middle of the lake right now, looking over our shoulder at a bunch of others and wondering if we’re going to make it to the other side. If we’re together, not only do we make it to the other side, but we become the best.”
The streaming business is war, the artillery is creative talent and economic investment. It’s not for the faint of heart. It’s very tough. Both AT&T and Discovery were doing well. In my mind, there aren’t going to be six or seven winners. When you look at what John was facing, a war with Netflix and Disney, two amazing companies, that’s a real challenge. Now together, we know we can get there. Can we be global in 200 million homes? These are fights to the death.
Comcast chairman and CEO
The world has obviously changed. Now, we’re one of 10 distributors of HBO in the same city, not including the 11th one, because they are also distributing themselves. You don’t find many businesses — Pepsi, Toyota, others — where you are not the sole distributor. The direct-to-consumer world has exploded, and we’re all reinventing our relationships.
It’s a great fit. WarnerMedia needed global scale to compete, Discovery has material presence in over 200 countries in 80 languages, plus great synergies and strength in the traditional business in the United States. I believed AT&T would decide to spin or sell Time Warner to focus on their core connectivity business, and I’m delighted they chose Discovery to facilitate this transaction.
This is the biggest transaction in my career if viewed as an acquisition by Discovery. I’m very excited that this transaction creates a platform for David Zaslav and team to demonstrate on a large scale the skills they have in integrating two companies, developing a “best of” management team and executing a growth strategy on a global scale. It will be fun to watch.
I’ve been a lover of this business for a long time. I remember when Chuck Dolan launched HBO, and people stayed at motels so they could watch HBO. When you hear that music and you see the HBO brand, you know one thing: You’re going to see great storytelling, and when it’s done, you will have loved it.
HBO taught people that content is worth buying. It’s an incredibly unique company, and if we can get this deal done, we will take HBO around the world.
I was at a party this past Sunday, and everyone had to leave early to see Mare of Easttown. That’s the power of HBO. They are the greatest curators of quality — it’s their magic sauce. That’s what HBO has. And it’s not going to go away.
Excerpted from Tinderbox: HBO’s Ruthless Pursuit of New Frontiers by James Andrew Miller. Published by Henry Holt and Company Nov. 23, 2021. Copyright © 2021 by James Andrew Miller. All rights reserved.
This story first appeared in the Nov. 17 issue of The Hollywood Reporter magazine. Click here to subscribe.
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