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AT&T and Discovery in Talks to Merge Media Assets

Flight Attendant Food Network
HBO/Food Network

AT&T and Discovery are discussing the possibility of combining media assets to create an entertainment and lifestyle content giant with a global footprint to better compete in the streaming marketplace.

Bloomberg News first reported Sunday that talks are ongoing and a deal could be reached as early as this week. The deal would bring together such brands as HBO, HBO Max and CNN with lifestyle powerhouses Food Network and HGTV.

Sources close to the situation suggested that the two sides will look create a joint venture that would house AT&T’s media and entertainment assets along with Discovery’s suite of lifestyle channels. In that scenario, it’s believed that Discovery CEO David Zaslav and WarnerMedia CEO Jason Kilar would both maintain leadership roles, although those details remain sketchy.

There was immediate speculation that any deal between AT&T and Discovery would prompt other bidders to join the fray. There has been chatter in the marketplace that AT&T was quietly talking to Comcast about possible combinations for NBCUniversal with the WarnerMedia assets.

Reps for AT&T, WarnerMedia and Discovery declined to comment.

No matter what becomes of the AT&T-Discovery talks, it’s clear that AT&T is maneuvering to find a new configuration for the assets that it acquired for $84 billion only three years ago — after a hard-fought anti-trust battle with the federal government to complete the deal.

But AT&T has been grappling with the enormous $170 billion-plus debt load racked up by its $48 billion acquisition of DirecTV in 2016. That deal proved disastrous from a timing and bottom-line perspective. AT&T acquired the satcaster just as the pay-TV marketplace started to unravel in earnest with the rise of SVOD and free streaming alternatives like Netflix, Amazon, Hulu and now Disney Plus, HBO Max and Discovery Plus.

DirecTV has steadily lost subscribers at a fast clip over the past three years and its operations have been a drag on AT&T’s earnings. AT&T put the company on the block last year as part of its debt-reduction campaign but wound up setting a deal in February with private equity giant TPG to spin DirecTV out as a standalone company, in which AT&T owns 70%. The enterprise value of DirecTV in that deal was $16.25 billion — a far cry from the price AT&T paid five years ago.

News of the Discovery talks coupled with the DirecTV transaction are further signs of AT&T CEO John Stankey shifting the strategy pursued under his predecessor, Randall Stephenson, who stepped down as CEO in July 2020 after 13 years in the role. Stephenson was gung-ho to transform AT&T beyond its core telco operations. Stankey was Stephenson’s top lieutenant, tasked with overseeing the integrations of DirecTV and Time Warner with AT&T.

Discovery and WarnerMedia assets fit together easily on paper as both companies are largely focused on turning legacy cable brands into content engines for streaming platforms. The Warner Bros. studio has already shifted some of its focus to supplying movies and TV shows to WarnerMedia’s in-house channels. The question of whether Warner Bros. will continue producing for outside buyers is the subject of much internal debate, just as it is at Disney, NBCUniversal and ViacomCBS at present. News of the Discovery talks hit many WarnerMedia insiders, even senior executives, by surprise.

AT&T’s media buying spree also coincided with the ramp-up of its need to invest in the national rollout of 5G technology and systems. AT&T is banking on 5G to make it more competitive in wireless telco and high-speed data services that are the core of its current business. The combination of the heavy debt and the investment demands of 5G have created a level of strain that has raised concerns within WarnerMedia that even AT&T and its $230 billion market cap will struggle to commit the billions of dollars required in content costs to make HBO Max a true global force alongside Netflix, Disney Plus and Amazon.

WarnerMedia and Discovery are both pouring resources into fledgling streaming platforms. HBO Max launched a year ago this month. Discovery Plus bowed on Jan. 4. As of the first quarter, HBO and HBO Max had a combined 44.2 million subscribers — a gain of 3 million over the quarter. Discovery disclosed 13 million global direct to consumer subscribers in its Q1 earnings earlier this month but it was unclear how many were new subscribers rather than customers of Discovery’s existing Eurosport streamer in Europe.

Sources familiar with the situation say there is little doubt that any transaction would have to include a big role for Discovery’s Zaslav. He’s well respected as a media CEO and for overhauling and expanding Discovery’s operations dramatically since he became CEO in 2007 after a long career at NBC. There is some sense that other executives could be poised to thrive under new management, including Jeff Zucker, who heads up WarnerMedia’s sports properties and CNN.

Discovery shares have had a bumpy ride this year as the company was affected by the implosion of Archegos Capital Management in March. Shares closed Friday at $35.65, giving Discovery a market cap of $16.6 billion. AT&T stock has been on a steady uptick for the past month with shares closing Friday at $32.34.

(Pictured: HBO Max’s “The Flight Attendant” and Food Network star Giada De Laurentiis)

Brent Lang contributed to this report.