Discovery and AT&T’s WarnerMedia have officially closed their merger on Friday, creating a new media and entertainment giant titled Warner Bros. Discovery. The completion comes about 11 months after the $43 billion mega-deal was unveiled, faster than most observers had anticipated at the time.

Led by longtime Discovery CEO David Zaslav as CEO, who unveiled his top executive team on April 8, the new conglomerate plans to take on the likes of Netflix and Walt Disney in the streaming space, betting on a broad portfolio of scripted and unscripted content.

Wall Street observers have been bullish about the combination. The new sector powerhouse “will have substantial content production and distribution capabilities that can be utilized for a compelling direct-to-consumer offering targeting a variety of demos,” Barrington Research analyst Jim Goss wrote in a March 7 report.

In upgrading the stock of Discovery to “buy” in a January report entitled “Revving up the content engine,” Bank of America analyst Jessica Reif Ehrlich even argued: “As a combined entity, we believe Warner Bros. Discovery has the potential to be the most dynamic global media company.”

Peter Csathy, chairman of advisory firm CreaTV Media, similarly touts the potential for the new content behemoth. “Netflix, Amazon Prime Video and Disney+ are the ‘big three’ streamers vying for our eyeballs,” Csathy says. “But WarnerMedia/HBO Max was a contender, even before its merger with Discovery. HBO Max, of course, features perhaps THE top ‘brand’ (other than Disney itself) with HBO.”

For Discovery, its biggest merger ever also means a change of strategy, moving beyond its traditional focus on unscripted content, which Zaslav in the past described as an advantage. (“We’re not going to try and build a big scripted factory,” he said in 2015.)

But amid the streaming revolution and competition for a big, global streaming subscriber pool, Zaslav and his team have changed focus and are now betting on providing a broad-based mix of various forms of content. The companies with the “most appealing and complete” content offerings will win in the streaming age, he said in February, so Warner Bros. Discovery will benefit from its “broad menu of content to super-serve every demo and every family member.” Zaslav added that “we have a content library as big as Netflix’s,” concluding his take on the appeal of the merged content offerings for consumers by asking: “Who would ever want to leave?”

Management priorities

To ensure a successful integration, management has signaled that its first focus, once getting full access to and control over the WarnerMedia businesses after the deal close, will be on fully assessing operations and business trends and having executives from both sides really get to know each other and work together.

For former WarnerMedia staff, observers predict a culture change from the AT&T days. While driven and results-focused, Zaslav has a reputation for a less formal and more collaborative management approach than AT&T top executives, which sees him calling or talking to executives quite regularly.

In his new management set-up, he has done away with some extra management layers. On April 5, WarnerMedia CEO Jason Kilar told staff that he would leave the company upon the deal close (Wall Street had long expected that the merged firm wouldn’t need to keep his role), as did Ann Sarnoff, the chair and CEO of WarnerMedia Studios and Networks Group. A slew of top WarnerMedia corporate executives followed before the announcement on the merged firm’s top team.

Zaslav — who late last year revealed that he would relocate to Los Angeles to play a hands-on role in running the content powerhouse created by Discovery’s biggest deal ever — also said last May that his “number one priority” would be building “relationships with the creative community.”

Setting combined streaming offerings of the merged firm with an eye on growing global subscribers will be a core goal. Zaslav has signaled that the new Warner Bros. Discovery would look to reach “200, 300, 400 million” subscribers at some point in the future. Discovery ended 2021 with 22 million streaming subscribers, while HBO and HBO Max closed the year with nearly 74 million worldwide. In comparison, Netflix ended 2021 with nearly 222 million, Disney+ with nearly 130 million.

Discovery CFO, now Warner Bros. Discovery CFO, Gunnar Wiedenfels said in March that combining HBO Max and Discovery+ would bring together the subscriber acquisition power of the former with the customer retention power of the latter, creating “a blowout (direct-to-consumer) product and that should certainly drive very healthy revenue growth for years to come.” But Zaslav emphasized in February that his team would focus on competing in streaming, but not overspend to do so.

“To date, we have yet to see evidence of any media company being able to compete with Netflix and the other major streaming services without spending a lot more on content,” MoffettNathanson analyst Michael Nathanson noted in a Feb. 24 report in response to Zaslav’s comment. “Warner Bros. Discovery will likely look at re-allocating some of their combined content spend, which in addition to the cost synergies, should provide the company with more to invest in HBO Max going forward.”

Wall Street will also focus on the broader financial impact of the mega-deal. In regulatory filings, AT&T has forecast 2022 revenue for WarnerMedia of about $36.7 billion, while saying that Discovery has projected its revenue to hit $13.1 billion. On a combined basis, that would add up to $49.8 billion. (For comparison, the Walt Disney Co. reported $67.4 billion in revenue for its most recent fiscal year, while Paramount Global reported $28.6 billion.)

For 2022 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), the companies have predicted $6.8 billion and $3.6 billion (after stock-based compensation), respectively, for a combined $10.4 billion.

Cost synergies

As with all mergers, delivering on promised cost savings, in this case $3 billion-plus, will be important for investors and analysts, while also affecting executives and their decisions. Zaslav, Wiedenfels and their team are planning to closely assess latest business trends now that the marriage is completed. 

Barrington Research analyst Goss called the synergy goals “achievable,” explaining: “The company’s synergy target is about 20 percent of non-programming expenses for the combined entity. Both companies have meaningful overlapping spending on technology and marketing for their respective services, which creates a significant opportunity for synergies.”

Cowen analyst Doug Creutz similarly wrote in a report: “Much of the cost synergies is expected to be driven by cost savings from consolidating the two separate direct-to-consumer technology and marketing platforms, in addition to efficiencies expected from combining their linear portfolios.”

Reif Ehrlich sees “several areas for potential revenue and cost synergies,” including opportunity for “significant cost avoidance,” noting: “Discovery management has a track record of acquisition acumen and most recently outperformed the synergy targets from their 2017 Scripps acquisition, but the success of this transition is largely contingent on management’s ability to execute on multiple levels (reviving film and TV production while harnessing cash flow of traditional cable networks and driving a global direct-to-consumer service).”

Overall, Reif Ehrlich called management’s $3 billion cost synergies target “highly achievable” and drew up various scenarios, including a bull case scenario, in which the merged firm reaches “$1.1 billion in additional synergies, both revenue and cost” on the legacy business in such areas as  advertising and “additional cost rationalization.”

The Bank of America  analyst sees additional cost savings, and here is Reif Ehrlich’s math: Under the banner of “other non-corporate overhead/selling, general and administrative” expenses, she says Warner Bros. Discovery “could improve its marketing cost structures across U.S., international operations and particularly direct-to-consumer via better pricing and/or more consolidated marketing activity,” along with possible savings from changes to corporate offices, which could yield savings of around $1 billion.

Management is bullish on making good on its financial targets. “We could not be more excited to get going on integrating the two companies, as well as delivering the promises we have made to you, including $3 billion-plus of cost synergies and driving significant free cash flow to deleverage the company down to our target leverage range within 24 months,” Wiedenfels said on Discovery’s latest earnings conference call in late February.

Zaslav has emphasized the success of pulling off the $14.6 billion takeover of Scripps Networks Interactive, while acknowledging that the WarnerMedia combination is Discovery’s biggest deal ever. “We are fully aware of the fact that this is much larger, and it is going to be much more complicated and complex than what we dealt with when we brought Scripps and Discovery together,” he said in late February.

Discovery shareholders had formally approved the mega-combination of the factual and lifestyle media powerhouse with AT&T’s entertainment arm WarnerMedia on March 11. Discovery’s biggest shareholders John Malone and Advance/Newhouse had both given their blessing to the deal when it was unveiled last May. Shareholders of AT&T, led by CEO John Stankey, did not need to vote on the combination.

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