AT&T Is Trying to Catch Up with Netflix and Disney
- By Panos Mourdoukoutas
U.S. telecom giant AT&T (T) is trying to catch up with Netflix (NFLX) and Disney (DIS) in global streaming by merging its content unit WarnerMedia with Discovery (DISCA) to create a new entertainment giant.
The new entity will own the deepest libraries in the world with nearly 200,000 hours of original programming. In addition, it will bundle together over 100 of the world's most reputable brands, including HBO, Warner Bros., Discovery, DC Comics, CNN, Cartoon Network, HGTV, Food Network, the Turner Networks, TNT, TBS, Eurosport, Magnolia, TLC and Animal Planet.
The deal appears at first glance to be a win-win situation for all parties involved. AT&T will receive a $43 billion cash infusion, debt securities and debt retention, and its shareholders will end up owning 71% of the new entity, while Discovery shareholders will own the rest.
AT&T CEO John Stankey had the followng to say about the deal:
"This agreement unites two entertainment leaders with complementary content strengths and positions the new company to be one of the leading global direct-to-consumer streaming platforms... It will support the fantastic growth and international launch of HBO Max with Discovery's global footprint and create efficiencies which can be re-invested in producing more great content to give consumers what they want."
Discovery CEO David Zaslav was on the same page:
"During my many conversations with John, we always come back to the same simple and powerful strategic principle: these assets are better and more valuable together. It is super exciting to combine such historic brands, world-class journalism, and iconic franchises under one roof and unlock so much value and opportunity."
Wall Street also likes the deal. Shares of AT&T were up 2.5% in pre-market trading on Monday morning following the announcement, while Discovery shares gained 10%.
Still, I believe investors should temper their enthusiasm for the new entity and the shares of AT&T and Discovery. While the deal might have done brilliantly in the midst of less competition, the fact is that it comes when the U.S. streaming market is reaching a saturation point, as evidenced by disappointing subscriber growth by both Netflix and Disney.
For AT&T, the agreement represents a reversal of its early policies whereby the company tried to integrate traditional media with streaming vertically. The sudden change of tune could also be a cause for concern, in my opinion.
Meanwhile, both companies are heavily indebted, making them vulnerable to interest rate risks should interest rates be increased in the future, which they are bound to be at some point.
My advice to investors would be either to look for better opportunities elsewhere in global streaming, or perhaps to stay away from this slowing industry altogether.
Disclosure: No positions
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This article first appeared on GuruFocus.
