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Discovery and WarnerMedia Upfronts Take on Added Urgency After Proposed Merger

With a potential $55 billion in debt at the outset, both sides of the spinoff entity need to woo advertisers this week.

Succession Season 2 Brian Cox

Brian Cox in “Succession”

Peter Kramer/HBO

AT&T is getting out of the media business: The telecom giant has announced its intent to spin off WarnerMedia, which includes brands such as HBO and CNN, and merge it with rival company Discovery, Inc.

The deal, which was announced Monday and first reported by Bloomberg on Sunday, would make the combined (and still unnamed) company one of the largest media entities in the entertainment and journalism industries. WarnerMedia’s assets include TBS, TNT, Cartoon Network, the Warner Bros. film and TV studios, the HBO Max streaming service, and the aforementioned HBO and CNN. Discovery owns several of the top primetime cable networks, including HGTV, TLC, the Discovery Channel, and Food Network, and launched its Discovery+ streaming service in the United States earlier in the year. The deal is subject to regulatory approval and affirmative votes from Discovery’s shareholders and is anticipated to close in mid-2022.

For AT&T, the deal also indicates a major strategic reversal and suggests that telecom giant views its foray into entertainment and news media as a failure. AT&T finalized its Time Warner acquisition in June 2018 — an $85 billion investment that the telecom giant battled against regulators and an antitrust challenge from the Department of Justice to get approved. AT&T’s stock has underperformed since then and the company had $180 billion in debt as of March 31, according to the Los Angeles Times.

AT&T attempted to pivot to streaming via HBO Max, which it launched in May 2020; AT&T Chief Financial Officer John Stephens told investors in January 2020 that investments in HBO Max reduced AT&T’s Q4 2019 revenue by $1.2 billion. HBO Max suffered from slow consumer adoption in the months after launch AT&T eventually enacted large layoff waves at WarnerMedia, which analysts at the time partially attributed to the streaming service’s shaky launch. The conglomerate’s new deal with Discovery is likely an effort by AT&T to focus on the more consistently profitable parts of its business while shedding the assets that have served as financial drains, according to Brad Gastwirth, chief technology strategist at Wedbush Securities.

“A lot of old school executives have the mindset of ‘the bigger the better,'” Gastwirth told IndieWire in an interview. “You can still do well with a bigger pool of assets, but with the way media has changed I think it also comes down to providing content that this new media world wants to consume. AT&T is trying to focus on what they believe is their core business, and they might be viewing content in media as a lost revenue driver in the sense that they have to spend a tremendous amount on content to be relevant and would rather focus on fixed asset opportunities. If you look at its core telecom business, you don’t have to have hit television series or films. It’s a lot easier to offer consist things in telecom. Still, AT&T spent a tremendous amount on media, and this is quite a reversal.”

The WarnerMedia-Discovery deal was officially announced shortly before both companies are scheduled to market themselves to journalists and prospective advertisers at their annual upfront events later in the week. Discovery’s upfront will be held on Tuesday, while WarnerMedia’s upfront event will take place on Wednesday. It will be critical for both companies to address the deal during their upfront events to generate news and financial interest in the possibilities of the combined company, which would start with $55 billion in debt, according to CNN. So far, Wall Street is skeptical: AT&T’s stock was down 2.34 percent at press time, while Discovery’s stock was down 4.63 percent.

Regardless, if the deal goes through, the new company would immediately become one of the biggest names in the entertainment and news industries. WarnerMedia and Discovery own some of the biggest film and television IPs on the market, ranging from “Game of Thrones” and DC Comics to long-running hits such as “Diners, Drive-Ins, and Dives” to “90 Day Fiancé.” The new company would also immediately become one of the biggest entities in journalism: CNN’s viewership has steadily increased in recent years, while Discovery boasts a suite of documentary-focused networks and international news verticals such as the New Zealand-based Newshub. Gastwirth argued that the two companies’ sheer volume of high-profile assets ensures that a combined company could appeal to a wide range of demographics while courting new creative talents and revenue sources and could be a particular boon for the struggling HBO Max.

“I don’t think there’s a lot of hype around HBO Max by itself but if you combine it with Discovery you start to have a few different genres to offer,” Gastwirth said. “When people think HBO Max, they may think adult-oriented movies and shows, while with Discovery you start to open the audience to the whole family. The reason this new company could do well is because it will have bigger pockets and brands to attract and acquire new kinds of content.”

AT&T is the second telecom giant that has recently stated an intent to offload its media properties; Verizon announced on May 3 that it would sell its media brands, including AOL and Yahoo, to a private equity firm. Conversely, Comcast, which owns NBCUniversal, is continuing to invest in its Peacock streaming service, which rolled out in the United States in July 2020.

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