Content is king! That worn mantra is echoing across the media once again in the wake of Amazon’s $8.45 billion purchase of MGM Studios, which came days after the AT&T-Discovery deal. Is content really king, though? A closer look at the AT&T deal suggests otherwise.
Poor AT&T is depicted as the sucker in this saga, retreating just three years after buying the Time Warner assets it now will sell to Discovery. “The personal reaction is I’m a bit sad,” CEO John Stankey told The Wall Street Journal.
He may be fibbing. Mr. Stankey should be happy. He just pulled a Vietnam: Declare victory and get the hell out. The media business is in a content bubble. Hundreds of billions of dollars are on the line — and the AT&T-Discovery deal may be the first sign of a burst.
Media stocks have soared up more than 80% in the three years since AT&T bought Time Warner. Yet Discovery’s price for those same assets may amount to a rise of far less than that. More startling is that AT&T shareholders may take an actual loss, in terms of return on equity (the stock and cash they paid for the TW assets vs. the stock and cash they will get for selling them to Discovery and owning 71% of the new combo).
Four giants — Netflix, Disney, Amazon, and now New Discovery — have been spending more than $50 billion a year combined for original content. Plus billions more from Hulu, AppleTV, YouTube, NBCUniversal’s Peacock, ViacomCBS’s Paramount+ and others. Yet only Netflix has the “scale and momentum to keep making these somewhat lunatic investments in programming,” Barry Diller, chairman of IAC, told CNBC late last month.
On cable television, viewers can watch some 500 scripted series and a few hundred reality shows each year. Now the content bubble is adding a few thousand new episodes and new movies to that mountain of programming, annually. Meanwhile, the time we have for watching it is finite, even in a pandemic lockdown.
By the end of this year, Netflix spending on original shows and off-network reruns will eclipse $70 billion in five years. Lately, 70% of its spending is for high-cost new productions rather than cheaper off-network reruns. Nonetheless, for one recent week, ended April 25th, Nielsen says network reruns occupied eight of the top 10 most-watched shows on Netflix.
Something about this gnaws at me.
For AT&T, the cost of misadventure is steeper than it looks. AT&T’s market value is down $47 billion (22%) in three years. AT&T is shedding assets that were a supposed growth engine. It is cutting its quarterly dividend, once sacrosanct. “It’s something unthinkable, even heretical,” the venerable Allan Sloan writes in The Washington Post.
So, how much of a premium is AT&T getting for WarnerMedia? The numbers:
- Final price AT&T paid for Time Warner, June 2018: $102 billion in cash, stock, and debt.
- Price AT&T may get for same, May 2021: $150 billion in cash, stock, and debt.
This consists of $43 billion in cash, debt securities, and Warner debt, plus a 71% stake in New Discovery (spun off to AT&T shareholders). The Financial Times pegs the new firm’s value at $150 billion (including $55 billion in debt, as Discovery CEO David Zaslav told The Journal). A 71% stake would be worth $106.7 billion. Add $43 billion and round up, and you get $150 billion.
That works out to a 47% gain in 35 months for the Warner assets. Nice enough, but far behind the 83% surge in S&P media & entertainment group index in the same period. The broader S&P 500 is up 48%, AT&T is up 13% in that time.
Moreover, look solely at the equity — cash, stock and assets — paid out in both deals, and the Discovery sale could be viewed as an outright loss for AT&T investors. The numbers:
- Excluding debt, AT&T paid $78.8 billion in cash and stock for Time Warner.
- Excluding $55 billion in debt, New Discovery would have $95 billion in equity. AT&T shareholders’ 71% share of that would be worth $68 billion — down $11 billion or 14%.
That is quite a haircut for a king. For media investors, the question is: What might it say about all the other media assets that are such hot properties right now?
Dennis Kneale is a writer and media strategist in New York, after six years as anchor at CNBC and Fox Business Network and 25 years at The Wall Street Journal and Forbes. He helped write "The Trump Century: How Our President Changed the Course of History," by Lou Dobbs, published in September 2020 by HarperCollins. Read Dennis Kneale's reports — More Here.
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