Why the AT&T, Discovery deal puts the most pressure on Comcast

Yahoo Finance’s Julie Hyman, Brian Sozzi, and Myles Udland discuss the AT&T-Discovery deal and what it means for the future of both companies with Craig Moffett, MoffettNathanson Analyst.

Video transcript

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MYLES UDLAND: All right, welcome back to "Yahoo Finance Live" on this merger Monday. Big headline today, Warner Media and Discovery getting together to create a new media entity. AT&T unloading the media assets that they collected with all that pomp and circumstance over the last half-decade or so.

Joining us now to talk about the impacts of this deal, what it means for the media sector and beyond is Craig Moffett. He's an analyst over at MoffettNathanson. Craig, let's just start with if you're surprised by the timing, how quickly this came together. We were just chatting. You guys had a conference a couple of days ago. And it didn't seem that this deal was imminent to be announced.

CRAIG MOFFETT: That's right. We certainly didn't get any indication that they were planning to sell it. But we've been saying for a long time, it wasn't sustainable for them to continue to own this set of assets. They had three separate businesses that need a lot of investment. The HBO Max business needs a ton of investment to keep pace with Disney. The wireless business needs a ton of investment to keep pace with Time Warner. And the consumer broadband business needs a ton of investment to keep pace with cable. They just didn't have the money to do all three of those things at once.

JULIE HYMAN: Hey Craig, it's Julie here. I have seen a little bit of praise this morning for AT&T, including from Elliott Management, that they're making this move. But I mean, it's not like this deal was without cost for the company, including, as you pointed out, this morning, it looks like AT&T is cutting its dividend as a result of this.

CRAIG MOFFETT: Massively cutting the dividend. They're cutting the dividend almost in half. So it goes from a $15 billion dividend to about an $8 billion dividend. And you have to wonder, notwithstanding that the stock is trading up today because there is some enthusiasm for owning the WarnerMedia piece of it or the Discovery piece of this. But after this is done, if you previously owned an AT&T that yielded almost 7% and had a little growth kicker in it from HBO Max, now you're going to own an AT&T that doesn't have that growth kicker and is only generating a 4 and 1/2 percent yield.

You have to wonder whether that's going to be enough for the investor of AT&T or whether you could see AT&T give back a lot of this pop and then some as people start to come to terms with, it's just not the yield play that you thought it was.

BRIAN SOZZI: Craig, with the exception of two folks, the AT&T board, most of the members of the same folks that signed off on the Time Warner deal. What are your thoughts on AT&T's corporate governance?

CRAIG MOFFETT: Well, actually, I may surprise you here. I think you have to give them some credit for acknowledging that they made a terrible mistake because this was not like one of those situations where you could say, the new management blames it on the old management, the new management being John Stankey, and the old management being Randall Stevenson.

John Stankey rode shotgun on both of the big deals that they've now unwound in the last few months. He was very much a driver of the DirecTV deal. And he was very much a driver of the Time Warner deal.

And it is rare that you see a management team and a board actually acknowledge so clearly that they made a terrible mistake and that they're willing to undo it. And so I actually give them some credit for it.

Now, that's not to say it doesn't leave behind a tremendous amount of wreckage, right? I mean, they spent $175 billion for these assets. And then, three years later, they're unwinding those positions for what is kind of, in theory, I guess, about $80 billion or so. So they destroyed a ton of value. But not many companies are willing to admit that they made a mistake in this forthright a way.

BRIAN SOZZI: This larger media company that will be Discovery, is that bad news for Netflix?

CRAIG MOFFETT: It's going to put pressure on everybody else. But I don't know that it directly puts-- look, Netflix knew they were going to have to compete against some big players. And clearly, it means that Discovery will be one of those big players. Amazon, I think, just by virtue of who they are, was going to be one of those big players.

The question now, I think, the one it puts the most pressure on is probably Comcast, where now the question is, what do you do with Peacock, their streaming play at NBC Universal? Is that big enough? Almost certainly not. So what do you do about that?

Do you try to get involved in the bidding here, or do you try to outbid Discovery for the WarnerMedia assets? You couldn't keep most of them. A lot of them-- you probably wouldn't want TNT and TBS, the cable networks inside of Turner. And you wouldn't be allowed to own CNN because you already own MSNBC.

But do you try to get involved to say, we really need to own HBO Max and potentially the film and TV studios at Warner Brothers? And so you could see them getting involved because otherwise, they're sort of left on the outside, looking in in this kind of race for scale. I think it's a much bigger strategic question for Comcast than it is for Netflix.

JULIE HYMAN: Craig, what does the leadership profile of this new entity look like when you think about Jason Kilar, when you think about Jeff Zucker, and of course, Zasloff running the thing, how does that sort of shake out in the coming year? And does it matter if these people stay inside? Is it going to add value?

CRAIG MOFFETT: Look I think it's a very competent management team with a clear enough structure. Sometimes you see these things where there's some ambiguity about who's in charge. There's no ambiguity about who's in charge here. David Zasloff is in charge.

But Jason Kilar will be driving the streaming assets. I think he's distinguished himself already and shown himself to be a really good steward for that. So I have a lot of faith in Jason. And Jeff Zucker, obviously, is a very experienced hand in the traditional cable networks and that sort of thing.

So they've got a good management team in place. Now, I can't really speak as competently as my partner Michael Nathanson on the management team one level below that that's going to be taking care of these assets. But the leadership team, I think, is a good leadership team.

MYLES UDLAND: You know, Craig, I think it's a very media thing of me to do to say, oh, this deal is announced, so let me immediately think about what the next part is. But I look at this new entity. And I see four units. I see a movie studio. I see a streaming bundle. I see very successful cable networks. I see sports.

I guess I see five. Then there's sports, and there's news. Does this all stay together indefinitely? Or is there opportunities here for the new Discovery to become new Discovery in various parts?

CRAIG MOFFETT: I think for now, it stays together. I think the big question mark hanging over any media company that has one foot in old media and one foot in new media is, what's the future of the traditional cable networks? They generate a lot of cash today. But they're clearly secularly declining assets.

So they will have to grapple, just like Disney grapples with what happens to legacy ESPN, for example. Discovery is going to have to grapple with what happens to the legacy cable networks. And now they will have not just the ones that they had before but also the new ones that they get in TNT and Turner and TBS and Cartoon Network.

But I think for now, they logically stay together. They try to take some cost out. In some kind of concept of portfolio theory, I guess, what you try to do is take the cash that's being generated by the legacy cable networks as they decline. And they may actually-- they will have much more negotiating leverage to get better deals for those than they otherwise would have if they don't merge.

And then you take that cash. And you try to reinvest it in the growth business, which is clearly the streaming platform. And I think it's pretty clear that that streaming platform will not just be the scripted content, whether it's reality TV that Discovery did a lot of or scripted dramas and comedies and things.

But also that now you start to add a live component to it, including sports. So TNT and TBS bring baseball and basketball. And they just did an NHL deal. And that's going to be an important part of the platform. And obviously, CNN, as a news distributor, is all about being live.

So I think what you can expect here is now, a much bigger role for live alongside scripted in the streaming content that is now the cornerstone of their subscription video on-demand business.

MYLES UDLAND: Yeah, and at least as part of that portfolio, you don't also have a massive telco trying to grow its cell phone subscribers or whatever.

CRAIG MOFFETT: That's true. It never made sense to have them together.

MYLES UDLAND: That strategic incoherence, yeah, has gone a little bit. All right, Craig Moffett, analyst with MoffettNathanson. Craig, really appreciate the time this morning. Thanks so much for jumping on.

CRAIG MOFFETT: My pleasure. Good to be here.