May 19, 2022


Fine Art Of Business

Why Warner Bros. Discovery merger is the ‘most exciting story’ in streaming: Analyst

3 min read

All eyes are on AT&T’s (T) WarnerMedia spinoff with Discovery (DISCA).

“This is going to be the most exciting story in the sector for the next few years,” Jessica Reif, research analyst at Bank of America, confidently told Yahoo Finance.

The telecom giant revealed it will issue a special dividend to shareholders on April 5 when they can decide whether to own just AT&T, the soon-to-be Warner Bros. Discovery, or both.

AT&T’s WarnerMedia will represent 71% of Warner Bros. Discover, and its shareholders will receive an estimated 0.24 shares of the new joint venture for each share of AT&T that they own once the transaction closes.

WarnerBros. Discovery, which is set to trade on the Nasdaq (^IXIC) under the ticker symbol “WBD,” will be run by Discovery CEO David Zaslav, with Discovery CFO Gunnar Wiedenfels serving as the new company’s CFO.

On Tuesday, it was revealed that WarnerMedia CEO Jason Kilar will depart once the merger closes, according to an internal memo. Kilar, who co-founded Hulu, was appointed by AT&T to run WarnerMedia in April 2020.

“With the pending transaction with Discovery nearing close, now is the right time to share with each of you that I will be departing this amazing company,” Kilar wrote.

“There are many feelings one could have in a moment like this, but for me there are none bigger, or more lasting, than the feelings of gratitude and love that I have for this team, this company, and this mission. I’ve never been more fulfilled professionally. I’ve never been happier professionally,” he continued.

This is probably going to be the broadest offering the market has yet to see…Jessica Reif, Bank of America Research Analyst

Bank of America’s Reif, who previously wrote that “the combination of these highly complementary assets, has the potential to create a global media powerhouse,” further explained how the new entity will disrupt the market.

“If you step back, this is probably going to be the broadest offering the market has yet to see,” Reif stated, emphasizing the immense advertising potential that could result, in addition to the company’s ability to optimize content spend, increase marketing efficiency and reduce churn.

‘Mare of Easttown’ (Courtesy: HBO MAX)

The analyst referenced the elevated scripted content of WarnerMedia’s HBO — from cultural success Game of Thrones to the more recent phenomenon Mare of Easttown — along with Discovery’s quirky, cult-favorite programs, such as Dr. Pimple Popper and 90 Day Fiancé.

“[HBO Max] is at the very beginning of its growth curve,” Reif continued, noting the streaming service has been “on fire,” despite increased competition in the space.

HBO Max (along with ESPN+ and Paramount+) attracted the highest year-over-year increases in downloads last month, according to a new Bank of America note, citing Sensor Tower data.

The platform, which registered 9 million downloads in March (+142% Y/Y), likely benefitted “from its generally strong content offering, additional markets vs. the year ago period as well as new/recent releases including: West Side Story, Winning Time: The Rise of the Lakers Dynasty, The Tourist, and Minx,” Bank of America said.

Streaming wars intensify

Streaming wars intensify amid WarnerMedia, Discovery merger

‘Is this a business?’

As investors begin to shift focus away from subscriber growth, Reif predicted that business operations and profitability will be key variables for shareholders moving forward.

“‘Is this a real business?’ ‘Can you make money?’ Can you offset the declines in the legacy business?'” the analyst said, reiterating her belief that Warner Bros. Discovery has “the best set of assets” to not only help offset declines in the secular business but also expand “into the next growth curves of streaming.”

Still, execution remains a top challenge amid new management and restructuring woes, although Reif said she expects that the company will “thoughtfully” answer and respond to potential problems in due time.

Overall, Reif believes that Zaslav “will be the industry leader,” replacing the void left by former Disney CEO (DIS) Bob Iger’s departure.

“[Zaslav] has a proven track record,” she continued, noting that the executive will be able to handle increased competition as other services begin to ramp up content production and build their individual brands and libraries.

“Warner Bros. Discovery is just getting started,” the analyst concluded.

Alexandra is a Senior Entertainment and Food Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193

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