AT&T/Discovery: A telco concedes defeat

AT&T went to war with Donald Trump’s Department of Justice for this? On Sunday, reports emerged that the sputtering telco juggernaut was close to spinning off and then combining its media business with Discovery Inc, the latter a hodgepodge of cable networks now trying to swing it in digital streaming. The combination’s enterprise value would be around $150bn.

Just three years ago, AT&T had closed its $109bn deal for Time Warner after a bruising tussle fighting the government’s antitrust suit. AT&T over the past decade had tried to move beyond its mobile, broadband and wireline phone businesses to be a major Hollywood player. Instead, its two major acquisitions — Time Warner and DirecTV in 2014 for $67bn — proved to be millstones as first Netflix and now Disney have come to dominate digital entertainment. Discovery has carved out a nice niche of low brow, low-cost reality TV (eg Naked and Afraid). Yet whatever heft it gains by joining forces with WarnerMedia is tempered by an odd strategic fit. Clearly, AT&T is desperate to cut this cord.

Pre-pandemic in 2019, Discovery generated almost $5bn of ebitda. However as pay TV subscriptions slowly melt, it has recently launched its own straight-to-consumer product. It says the right thing about how the economics are good enough to avoid cannibalisation but the company’s long-term viability was in doubt as the entertainment field narrows to a handful of $100bn plus players.

WarnerMedia’s HBO and its recently launched HBO Max streaming service now have together around 44m US subscribers paying on average $12 per month. But the growing and uncertain cost of content and the $150bn net debt load AT&T carries was complicating the company’s hefty dividend as well as its ability to focus on 5G supremacy in its core mobile phone business. 

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Since the announcement of the DirecTV deal in 2014, AT&T shares are down a tenth, a figure that would be worse if AT&T had not fortuitously avoided cutting its dividend. Meanwhile in that time period, Netflix shares are up more than 700 per cent. Two telcos that did not stray into content, Charter Communications and T-Mobile are up at least 300 per cent. AT&T rejoiced when it defeated the government and closed on buying Time Warner. For AT&T shareholders, the victory has proved pyrrhic.

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