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Why The Discovery-AT&T Deal Poses A Credible Threat In Streaming Wars

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Why The Discovery-AT&T Deal Poses A Credible Threat In Streaming Wars

One of the biggest megamergers in the entertainment industry — between streaming assets from AT&T Inc (NYSE: T) and Discovery Communications (NASDAQ: DISCA) — was announced Monday.

The Streaming Merger Deal: The deal combines the premium entertainment, sports and news assets from WarnerMedia, an AT&T unit, with Discovery Communications.

A Reverse Morris Trust deal will see AT&T shareholders get 71% ownership in the new company in a tax-free spinoff. Current Discovery Communications shareholders will own 29% of the new company.

The combined company could have $3 billion in cost synergies annually, an industry-leading free cash flow conversion of 60% and in 2023, a possible revenue of $52 billion and an adjusted EBITDA of $14 billion.

Competing With Streaming Giants: The new company has more than 100 brands and over 200,000 hours of programming content from key assets such as Warner Bros, Discovery, DC Comics, CNN, Cartoon Network, HGTV, Food Network, TNT, TBS, Eurosport, Magnolia, TLC, Animal Planet and ID, as well as the direct-to-consumer streaming brands HBO Max and Discovery+.

Content is key for streaming companies with original and popular programming attracting subscribers.

“In our view, DISCA/WarnerMedia would be a powerhouse content and streaming company offering investors pure-play exposure to enticing best-in-class content assets,” Bank of America analyst Jessica Reif wrote in a note.

HBO Max has performed ahead of company expectations and could be in for a boost soon with the launch of the exclusive “Friends: The Reunion” special.

As more Americans cut the cord, they have a variety of streaming platform options, including Netflix Inc (NASDAQ: NFLX), Walt Disney Co (NYSE: DIS) and Comcast Corporation (NASDAQ: CMCSA), to choose from, which ultimately adds up in cost. 

Consumers are looking for the best content, searching for original programming they can’t get anywhere else and fits their favorite genres. That could be how this combined company ends up winning the streaming wars.

“A combined entity would have an enhanced ability to offer the widest variety of content to attract the largest possible subscriber base on a global basis,” Bank of America analyst David W. Barden said.

Related Link: Discovery Streaming Platform Could Win Big With Strong Brand Content Library

What’s Next: While prices are likely to stay the same now, the combined company could experiment with price increases and bundled plans to offer HBO Max and Discovery+ together or launch as one all-inclusive platform.

Fast Company notes that when media assets merge, it typically leads to higher prices for customers. This isn’t great news for consumers but could provide a boost to shareholders.

ViacomCBS Inc (NASDAQ: VIAC) raised prices for its pay-TV channels after its merger.

When Discovery acquired Scripps, it led to the company having more negotiating power to charge more and for providers to include more channels from the combined company.

Discovery could hold the upper hand in negotiations as it has direct-to-consumer options for its content if cable providers and streaming platforms don’t want to shell out the big bucks.

Discovery+ costs $5 a month for its basic plan and $7 a month for no ad service. HBO Max costs $15 a month for its streaming service. These plan prices could rise after the deal goes through and a bundled option could quickly look affordable to consumers.

When Discovery+ was launched it had the largest amount of content for a new streaming service in the U.S.

Discovery CEO David Zaslav has called for Discovery+ to be the “SUV of brands” compared to sports cars of Disney and Netflix. Zaslav could be racing ahead to being closer to a sports car against rivals with the combined company.

Price Action: Shares of Discovery rose in early trading Tuesday but closed down 5.05% to $33.85. AT&T shares are down 2.67% to $31.37.

(Photo: StockSnap via Pixabay)

Latest Ratings for DISCA

DateFirmActionFromTo
May 2021MoffettNathansonDowngradesBuyNeutral
Apr 2021MacquarieUpgradesUnderperformNeutral
Apr 2021Wells FargoUpgradesEqual-WeightOverweight

View More Analyst Ratings for DISCA
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