WarnerMedia merging with Discovery in $43 billion deal

Mitch Roschelle, Founding Partner Macro Trends Advisors LLC, joined Yahoo Finance Live to break down the $43 billion WarnerMedia-Discovery merger

Video transcript

- Let's keep this discussion going with Mitch Roschelle. He's the founding partner of Macro Trends Advisors. It's good to have you here, Mitch.

Let's get right to the point. I heard Kara Swisher, I think it was, say that this was a disaster from the beginning. AT&T really blew it. They got $160 billion in debt. They paid $85 billion for Warner. Why is everyone singing their praises today?

MITCH ROSCHELLE: Well, I think it's an answer to an unanswered question, which is, what is the future of those assets? And clearly, competing in the streaming wars is something that they were having a hard time doing within their own platform. And that's what I think David Zaslav and the Discovery team want to do. They become, as the previous guest said, the third. And they have a variety of content from all of the HBO and HBO Max assets, to CNN and Turner.

And what's interesting is in the streaming space, they could become a big player with sports. So I think it's very interesting. And, but again, I think there was a lot of uncertainty that had been weighing down AT&T stock for a long time, and now we know what the future of those assets are.

- Mitch, from an investor standpoint, when you take a look at this newly merged company with Discovery and Warner Media, is that an attractive opportunity, do you think? Or are they going to have a tough time competing with their two larger rivals, Disney and Netflix?

MITCH ROSCHELLE: Shauna, I definitely think they're going to have difficulty competing, but David Zaslav has said, we're going to spend $20 billion, with a B, annually on content. That could mean content that they develop themselves, content they buy. And I think that content is king, but they're going to have a long way to go. I think the numbers-- you know, 64 million subscribers that they have, maybe it becomes 90 million if you combine the two and they retain all of them. Globally, Netflix has to over 200 million subscribers.

So, I think getting to those subscriber numbers are going to be difficult. But I think they do have the content, and clearly, they have the budget if they want-- if this is going to be a race to see who can spend the most to create the most content.

- Or it could be a race like the Reagan-era race the arms race, to outspend the Russians-- I'm serious-- because $20 billion a year for content for a company that, in the last earnings report, we learned that money was generated from sports, as you pointed out. But there was also 5% of revenue came from the re-transmission fees. Those are going to start to disappear over the next couple of years for the owned-and-operated stations. Aren't they?

MITCH ROSCHELLE: Yeah, and I also don't forget they used to be tied to a cellphone company, and they had the ability to get subscribers by giving HBO Max for free if you got a new phone. So, they're going to lose some of that linkage.

The other thing is, with cord-cutting, it's going to come a point where there's subscription overload, and people are going to look and say how many of these monthly fees do I want, and I can't believe I'm now paying more than I paid when I had a cable contract. So, I think that, yes, this is a race to see who spends the most. But I think that the consumers are going to be very discriminating, and they're not going to keep those subscriptions if they're not getting value out of them.

- Mitch, let's zoom out a little bit and talk about what we're seeing overall with some of these bigger names. We're talking about streaming. A lot of that has to do with some of these big tech names. Netflix, for example, has been under pressure since the start of the year, with shares off nearly 10%. Some of the other big tech names are also in the red for the year.

When you take a look at what's going on trading wise with some of these bigger tech names, are you seeing an opportunity to buy? Or do you think there's going to be more trouble ahead because of all the inflationary pressures?

MITCH ROSCHELLE: Shauna, I definitely think there's inflationary pressure. And the thing that I look at-- and the market does, as well-- is the 10-year Treasury. You notice it's been the habit for the last maybe two, three months, every time that 10-year Treasury gets over some reference point-- let's say 170 basis points, or 1.7%-- all of a sudden, they start selling those tech names.

You know, quite honestly, I really don't think that those names are as sensitive to inflation as the market may think. And if you look at the last earnings season that we just sort of on the tail end of, those are the names that really, really outperformed. So, I think there are opportunities to buy the dips in those names. That have been leaders in the S&P 500-- and if not, the Dow-- for the past decade. And I think the fact of the matter is they will continue to be, and there are buying opportunities on dips.

But I will tell you, the broader market is super focused on inflation and, if not, spooked by it. And largely because, I think, the consumer is very concerned about inflation. And you saw that last week in retail sales, and I think you saw it in consumer confidence on Friday, as well.

- Well, and you've actually said that the indications are that there's now an expectation that inflation will go up to 4.6%. Whether it's 4.6 and 4.2, what does that really mean, for those of us who want to invest going forward?

MITCH ROSCHELLE: I think what it means is-- and I'm going to tie inflation to the 10-year Treasury-- I think what it means is it's going to drive interest rates up. I do think that the bond market is going to move rates well before the Fed does. But the uncertainty regarding the Fed's accommodation-- you have a bunch of Fed members speaking this week, and I think they're probably-- Chairman Powell likes for them to be very transparent, and I think they're going to continue to indicate that they have no current plans to taper, they have no current plans to move rates up.

But I think that the market has done very well with all of that accommodation. And the uncertainty is, what happens when the accommodation stops? I remember when there was a taper tantrum and, in a past life, Adam, you and I were covering that together. I think we could very well, in the next 12 months, see another taper-tantrum type situation.

- Yes, but the difference now is you and I are both in better places. Mitch Roschelle, all the best to you. Founding partner of Macro Trends Advisors, LLC.