WarnerMedia/Discovery Seen Getting US Regulatory Nod

AT&T's simultaneous spinoff of WarnerMedia and joining it with Discovery is expected by some to skate through regulatory OK. AT&T said the deal announced Monday will result in a huge increase in customers it serves by fiber and its 5G C-band network.

AT&T CEO John Stankey predicted regulatory approval would be “a straightforward process,” in a call with analysts. FBN Securities analyst Robert Routh told us the only area where the deal might face a hurdle is in news, but generally that shouldn't raise red flags since WarnerMedia/Discovery is smaller than Disney or Netflix. AT&T and Discovery didn't answer our questions. A news bulletin on the transaction is here.

Some experts are less sure it won't face regulatory headwinds. Matthew Spitzer, Northwestern University Center on Law, Business and Economic Growth director, said it's not clear the deal creates enough market power in production and distribution to be a genuine antitrust issue. But he said the Biden administration “has already nominated a neo-Brandeisian to the FTC, Lina Khan, [and] these folks really dislike big business.” DOJ, the FCC and FTC declined to comment.

Horizontal deals like WarnerMedia/Discovery traditionally get the most searching scrutiny under antitrust law, said Rutgers Law professor Michael Carrier. He said review depends on the market share of the combined company. Former FTC Commissioner Maureen Ohlhausen, now at Baker Botts, said all large transactions are likely to face scrutiny in the Biden administration.

Diana Moss, American Antitrust Institute president, said this will likely get a close antitrust look due to high levels of media content concentration. The media market is rife with “brand proliferation” and many brands such as networks and movie studios, but they're controlled by only a few market players, giving the illusion of competition, she said. The deal could hurt bargaining power of content creators such as writers, she said. WarnerMedia/Discovery should be “a huge red flag for antitrust enforcers” that claims of more efficiencies in vertical deals could be hugely overblown, Moss said. That AT&T is spinning off Warner shows the promised vertical efficiencies from when it bought Time Warner “were sold as a bill of goods,” she said.

Common Cause, which also opposed AT&T/TW, said that deal “has proven to be as disastrous as many of us predicted.” It said Warner/Discovery “will undoubtedly cost worker jobs, billions more in company debt and consumer harms [and] does not even begin to register on the scale of the public interest.”

FBN's Routh said AT&T/TW might have been a good idea, but the AT&T bureaucracy often makes acquisitions it undertakes challenging. He said AT&T could “save face” if WarnerMedia/Discovery ends up trading at a price that values those assets above what AT&T paid for TW. He said the WarnerMedia/Discovery structure -- with a spinoff and combination instead of sale -- has tax advantages and makes it difficult for another company like Comcast to try to break the deal in a bidding war for Discovery.

AT&T would receive $43 billion in cash, debt securities and WarnerMedia retention of some debt. It bought TW in early 2019 for $81 billion. Stankey told analysts the two programmer companies complement each other's content strengths and combined have big direct-to-consumer opportunities. DTC “is a global opportunity that is rapidly evolving” and global scale is needed to compete. Roku Chief Financial Officer Steve Louden said the deal is further proof the world is moving to streaming (see 2105170051).

Stankey said the deal is expected to close in mid-2022. AT&T shareholders will have 71% of the shares in the new company, while Discovery shareholders will get 29%, he said.

AT&T post-spinoff will have resources “to be a leader in broadband connectivity [and] double down” on its current fiber investment, Stankey said. He said AT&T plans to have 30 million homes covered by fiber by the end of 2025. He said the deal won't affect company plans to add 3 million fiber-to-the-home locations this year, though there could be an “incremental step up” of FTTH plans in 2022. He said its 5G C-band network will cover 200 million people in the U.S. by the end of 2023.

WarnerMedia/Discovery will combine 29 basic cable networks that generate about 25% of cable network industry revenue, and would surpass ViacomCBS, with 27 basic cable networks, S&P Global Market Intelligence said. New Street's Jonathan Chaplin told investors the WarnerMedia assets “are in better hands” as the deal creates some cost synergies and lets AT&T focus on its core communications business. He said it's not clear how the deal will change the DTC strategies for either programmer, or whether the new company will have the resources to compete as effectively with Netflix or Disney+.