AT&T said Monday that it will spin off its WarnerMedia assets, including HBO and CNN, and that they will be combined with Discovery Inc. to create a media heavyweight in a $43 billion deal.
The blockbuster deal will create the second-biggest media company in the country, by revenue, with a sprawling business that touches on streaming entertainment, movies, sports and cable news. The merged company, which could have a value above $100 billion, would rival behemoths such as Disney, the biggest media company, and Netflix, the leader in streaming.
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For the debt-saddled AT&T, the spinoff is an about-face from its $85 billion purchase of Time Warner in 2018. Industry analysts had questioned the acquisition, citing the continued acceleration of cord-cutting. AT&T fought for the deal despite vocal opposition from President Donald Trump, whose Justice Department unsuccessfully tried to block it.
The new transaction will combine HBO, Warner Bros. studios, CNN and several other cable channels with a host of reality-based cable channels from Discovery, including HGTV, the Food Network, Animal Planet and Oprah Winfrey's OWN.
With such a large menu of cable channels -- most of which are highly profitable -- the company can build a cash hoard to fuel the newer streaming business, which still loses money and needs time to gain enough customers to become profitable.
For consumers, this could mean even more shows to watch. But it's unclear what it would mean for streaming subscription prices or traditional cable bills. WarnerMedia's channels such as CNN and TNT and Discovery's channels benefit from automatic rate increases paid by cable and satellite operators. Having more channels could give the new company even more leverage when negotiating those rates.
Nothing is likely to change for HBO Max and Discovery Plus subscribers for now. AT&T executives said on a call with investors that their plans for HBO Max remain in place. Those include a rumored $10-a-month ad-supported version of the service, expected to be announced this week, and a June rollout in Latin America and the Caribbean.
Sports is another key component of the merger. WarnerMedia includes the sports-heavy cable channels TNT and TBS, and Discovery has a large international sports business.
"I believe we're going to be the best media company in the world with an ability to reach everyone in the world because our stories play well everywhere in the world," David Zaslav, the chief executive of Discovery, who will oversee the new company, said in an interview.
The deal represents the end of another failed attempt in the long history of corporate outsiders trying to remake the entertainment business. With few exceptions, those escapades -- from General Electric's ownership of NBC to Gulf and Western's control of Paramount Pictures -- ended badly.
As part of the deal, AT&T will get cash and bonds that would amount to $43 billion. It can now refocus on its wireless business, which has been battered as customers keep switching from one rival service to another. The costly expansion of 5G technology has also strained the company's balance sheet. AT&T shareholders will own 71% of the new business, with Discovery investors owning the rest.
Placing Zaslav, 61, a media veteran and the longtime chief executive of Discovery, in charge means Jason Kilar, 50, who was hired to run AT&T's media group only last year, is most likely on his way out. Kilar, a streaming pioneer who was Hulu's first chief executive, was kept in the dark about the deal until a few days ago. He has hired a legal team to negotiate his departure, according to two people familiar with the matter.
The deal could finally give Zaslav the size and scale he has long sought. A garrulous executive who can recall ratings figures off the top of his head, Zaslav represents the last of the old guard in media, a hobnobbing mogul known for hosting lavish get-togethers at his house in the Hamptons.
The companies said they expected the deal, which must be approved by shareholders and regulators, to be completed in the middle of next year.
AT&T and Discovery said the combination will save $3 billion annually to invest in content and its streaming service. That likely means layoffs as the departments combine and restructure.
"Unquestionably there's going to be some layoffs," said CFRA analyst Tuna Amobi.
For AT&T, the deal allows it to go back to being a purely telecommunications business and shed some of its nearly $170 billion in debt. Investors seemed lukewarm on the news, sending AT&T shares down 2.7%. The company announced a dividend cut that would nearly halve the annual payout.
'STREAMING ARMS RACE'
AT&T needs the extra cash to compete with Verizon and T-Mobile. The entire wireless industry is racing to claim the fastest speeds with products that could rival cable companies for broadband service. If successful, the wireless giants could take internet customers away from cable.
"This is a streaming arms race, and AT&T is making an offensive strategic move to further bulk up its content in the battle vs Netflix, Disney, and Amazon," Dan Ives, managing director of equity research at Wedbush Securities, said in an email to The Washington Post. "This was a now or never type of acquisition, with content king in the streaming wars."
The new media company will be bigger than Netflix or NBCUniversal. Together, WarnerMedia and Discovery generated more than $41 billion in sales last year, with an operating profit topping $10 billion. Such a sum would have put it ahead of Netflix and NBCUniversal and behind the Walt Disney Co. as the second-largest media company in the United States.
MERGER TREND
Traditional entertainment companies are struggling to keep viewers as the likes of Facebook, YouTube and TikTok draw big audiences. Consolidation appears to be the quickest way to buy more eyeballs, and the deal could set off another round of media mergers. ViacomCBS, the smallest of the major entertainment conglomerates, is often seen as a possible target.
To compete with Netflix (208 million subscribers) and Disney (104 million customers for Disney Plus), both AT&T and Discovery have invested heavily in streaming. AT&T has spent billions building HBO Max, which together with regular HBO now has about 44 million customers. Discovery has 15 million global streaming subscribers, most from its Discovery Plus app.
The new company expects to generate $52 billion in sales and $14 billion in pretax profit by 2023. Streaming will be a big driver of that growth, with an estimated $15 billion in revenue.
But the new company will also have $58 billion in debt. Zaslav emphasized that it would be generating enough cash to pay that down fairly quickly. The combined business will spend more than $20 billion a year on developing content, he added.
Information for this article was contributed by Edmund Lee and John Koblin of The New York Times; by Mae Anderson of The Associated Press; and by Jonathan O'Connell, Taylor Telford and Jacob Bogage of The Washington Post.