(Bloomberg Opinion) -- AT&T Inc. has spent more than four years struggling to explain its rationale for buying Time Warner Inc. and later creating HBO Max, a remarkable strategic shift that launched the ultra-profitable wireless carrier into the ultra-unprofitable world of streaming TV. It seems AT&T’s argument wasn’t strong enough to convince even itself as it now appears ready to give up on that plan.
Dallas-based AT&T is in talks to combine its WarnerMedia division, as the entertainment business is now called, with reality-TV programmer Discovery Inc., Bloomberg News reported Sunday. The explosive development comes as AT&T Chief Executive Officer John Stankey sells off a slew of assets that were acquired under his predecessor, Randall Stephenson, in an effort to reduce debt and redirect resources to its 5G wireless network.
Much of AT&T’s debt burden came from purchasing Time Warner, as well as DirecTV, another asset that’s being spun off. Should it proceed with a Warner separation next, AT&T will have unwound more than $170 billion of deals this year, with little to show for its brief time as the owner. Over the past decade the stock has risen a mere 2.6%. AT&T’s plush dividend brings the total return to 80%, but even that has significantly trailed the S&P 500 index.
Earlier this month, I flagged Discovery as the hottest takeover target in streaming because of its popular unscripted programming and successful franchises. They include HGTV with “Fixer Upper”, TLC with “90 Day Fiance”, Discovery Channel with “Naked and Afraid” and Food Network with “Chopped.” That makes the company’s new namesake streaming service, Discovery+, a unique offering in a market in which most others copy-and-pasted Netflix’s strategy of primarily splurging on scripted content. WarnerMedia’s assets include HBO Max, HBO, Warner Bros. studio, CNN and the other Turner networks.
Discovery+ and HBO Max together certainly make a more compelling subscription as their programs would run the gamut from trash TV to “Game of Thrones”-level art. In that sense, this merger makes far more sense than AT&T-Time Warner ever did. But it’s mind-blowing that so soon after going all in on streaming, AT&T may be backing away. It’s also unclear who will run the combined entity — Jason Kilar, the 50-year-old former Hulu CEO who leads WarnerMedia and HBO Max now, or Discovery CEO David Zaslav? A Wall Street Journal profile of Kilar last week implies he’s comfortable at his new digs.
Another character in this cast: John Malone. The 80-year-old cable-TV tycoon and dealmaker has significant voting power over Discovery and works closely with Zaslav, 61. He’s also known for striking complex transactions that are structured to skirt tax penalties, a hint at how this merger-spinoff might work. The details may still be in flux, with the Wall Street Journal reporting a less comprehensive combination of assets, including the CNN, TNT and TBS cable channels.
In any case, the deal would close a fascinating and frustrating chapter for AT&T investors. It had wanted to create an ecosystem that would foster loyalty for AT&T data plans. But Verizon Communications Inc. and T-Mobile US Inc. accomplished essentially the same through joint promotional offers with Disney+ and Netflix that didn’t require hundred-billion-dollar mergers.
AT&T fought tooth and nail for the Time Warner merger when the Trump administration’s Justice Department sued to block it on antitrust grounds. When the transaction finally closed in June 2018, AT&T considered it such an achievement that it awarded Stankey a $2 million “merger completion bonus” for overseeing the effort; he was Stephenson’s No. 2 at the time. The following year I wrote a story asking whether AT&T’s Hollywood plot was too far-fetched. In an interview for that piece, Stankey told me that AT&T needed scale in entertainment content to be able to compete with Alphabet Inc.’s Google, Amazon.com Inc. and Apple Inc. That the company came to see the tech giants as its primary competitors was both telling and ominous.
Still, it was his boss’s vision. Stephenson led AT&T for 13 years through June 2020, exiting amid the Covid-19 pandemic and the start of the streaming wars. As Stankey took the helm, the company’s debt load and Hollywood distractions had already begun to unnerve investors. T-Mobile was building an advantage in 5G as both the fastest-growing carrier and the owner of the most ideal swath of spectrum frequencies. Verizon and T-Mobile were talking up the possibilities of a 5G-enabled future while AT&T was constantly stuck defending a deal.
In AT&T’s latest earnings announcement, though, the picture seemed to be improving. With DirecTV now a cast-off, AT&T no longer needed to talk about the millions of satellite-TV customers it was losing. And together HBO Max and HBO signed up more people in the U.S. during the first quarter than Netflix did. Shares of AT&T rose 4% that day in April to a four-month high, and they’ve gained an additional 3% since then.
But the jig is up. Even though shareholders will be relieved to see AT&T reverting to its roots as a telecommunications provider, the money wasted in the process is tough to swallow. This will be even harder for WarnerMedia employees who have been through one shakeup after another with changing missions and owners and leaders.
The old Time Warner was one-half of what’s considered to be the most toxic merger in history: AOL Time Warner. Ironically, Verizon, AOL’s current parent, is in the process of ditching that asset — another case of a CEO fixing a predecessor’s mistakes. Now AT&T is ditching Time Warner. The lesson? Empire-building is a great way to wind up being studied in business-school textbooks. Add AT&T-Time Warner to the curriculum.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.
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