In 2018, AT&T’s (T) acquisition of Time Warner was finally approved by various governmental agencies for a whopping sum of $85.4 billion. Essentially, AT&T wanted to use its wireless and broadband services to deliver high-quality content (Time Warner-owned CNN, TNT, WB’s film & TV slate, HBO, etc.) to its consumers. 3 years later, however, AT&T is now planning to sell its entire WarnerMedia division to Discovery for a sum of $43 billion, through “a combination of cash, debt securities, and WarnerMedia’s retention of certain debt.” The deal would merge WarnerMedia and Discovery’s streaming services, making the ‘merged’ company worth roughly $150 billion, including debt. In addition, AT&T shareholders would receive a 71% stake in the new company while Discovery shareholders would receive a 29% stake.

That said, the question becomes – Why is AT&T selling WarnerMedia for a loss of $42.4 billion? After all, WarnerMedia has a plethora of lucrative assets, from its news division (CNN) to WB’s film & TV franchises like DC Comics, Harry Potter, etc. On paper, the idea of a cable and wireless company like AT&T leveraging its broadband services to serve customers with media content makes sense. In reality, however, the acquisition has been a disaster for AT&T and its shareholders, while also stretching its resources thin. Even Wall Street was against this deal, with the company seeing its stock price drop more than 20% since 2018.

Thanks to its pricey acquisitions of DirecTv for $48 billion or 67.1 billion with debt, and aforementioned Time Warner for $85.4 billion, AT&T has become saddled with over $180 billion in short-term and long-term debt, making it one of the most indebted companies in the world. In a crowded wireless space, which is its core business after all, AT&T is in need of a lot of capital to expand its current 5G infrastructure to compete against companies like Verizon (VZ), Comcast (CMCSA), and T-Mobile/Sprint (TMUS). A few months ago, the Federal Communications Commissions (FCC) held a massive 5G airwave auction, where Verizon, AT&T, and T-Mobile spent over $45.4 billion, $23.4 billion, and $9.3 billion respectively to acquire “C-band spectrum.” Without going on a tangent about the auction itself and the 5G and broadband network, the fact of the matter is that it is very expensive to upgrade the current infrastructure to deliver a high-speed 5G connection. In fact, AT&T ended up further increasing its debt-load by borrowing $14 billion to pay for the auction, which is becoming very unsustainable. AT&T is essentially fighting behemoths on multiple fronts (in telecommunication and in entertainment) with very limited capital and is trailing in both. As Ron Swanson famously said, “Never half-ass two things”…

Speaking of, while half of the company’s focus was on 5G infrastructure, the other half was set on rolling out the company’s flagship streaming service, HBO Max, in the hopes of taking on Netflix, Disney, Amazon, etc. Despite spending billions of dollars on original content for both HBO and HBO Max, the results have been disappointing, to say the least. By the way, I do have to express my befuddlement at the marketing of HBO Max, as the company failed to effectively distinguish between its 4 services – HBO, HBO Go, HBO Now, and HBO Max. As someone who follows the entertainment and business world closely, even I was confused at the difference between the aforementioned services… Apologize for the tangent but, this marketing blunder proved to me why a merger & acquisition (M&A) of companies in 2 completely different industries is not a good idea. Okay, back to subscriber growth, or lack thereof in the case of HBO Max. In terms of subscribers, AT&T reported that HBO & HBO Max added roughly 2.7 million subscribers domestically in the last quarter, with a current tally of just 44.1 millions HBO and HBO Max subscribers domestically and roughly 64 million subscribers globally. The bump in new subscriptions was much lower than expected, despite having HBO Max-exclusive releases like Zack Snyder’s Justice League and day-and-date releases for big movies like Godzilla vs. Kong, Mortal Kombat, Wonder Woman 1984, etc.. On the other hand, many streaming services reported solid subscriber growth while not having to raise their subscription cost a whole lot. Here is the subscriber number for the other streaming services – Netflix (NFLX) currently has over 207 million subscribers, Disney (DIS) currently has roughly 160 million subscribers (Disney+ has 103.6 million subscribers, Hulu has 41.6 million subscribers and ESPN+ has 13.8 million subscribers), Amazon (AMZN) Prime currently has over 200 million subscribers, Comcast’s Peacock currently has over 42 million subscribers, Discovery+ has over 15 million subscribers, ViacomCBS’s Paramount+ currently has over 30 million subscribers, and Apple+ *is estimated* to have roughly 40 million subscribers based on third-party data. The competition is clearly heating up in the streaming service space and ultimately, consumers will only have the money to sign up for a couple of services, which has arguably left some services in the dust already (ie. Quibi). By merging WarnerMedia and Discovery, HBO Max and Discovery can offer more content for a reasonably priced subscription cost between $7/month and $15/month, making it a better bargain for the consumer. Considering Discovery+ is best known for its educational content (Discovery Channel, Animal Planet, etc.), and HBO Max is best known for its adult-oriented fictional content, an amalgamation of the 2 would have a four-quadrant appeal and would most definitely help expand its viewer base.

By merging the 2 entertainment companies, who have a similar entertainment-oriented vision anyways, the end result would be better for the consumer, while also allowing AT&T to use the $43 billion to focus on its core business of 5G network and fiber network expansion.