A Peak Behind the Curtain of a Media Megalodon
Some thoughts following John Malone's interview with CNBC.
John Malone recently did an interview with CNBC (full link below) discussing the proposed merger between Discovery (of which he is a controlling shareholder) and WarnerMedia (currently part of AT&T). Here are a few things that stood out to me:
He Thinks HBO Max is in a Tough Spot.
This is probably a consensus opinion at this point, but John Malone isn’t just some media analyst who covers the space, he is on the board of the company. To criticize a media asset and then go out and acquire it is interesting to say the least. Malone mentions how it has struggled to gain a U.S. foothold and is at a premium (I interpret this as “weird”) price point. Growing internationally has also been a struggle due to several other Media Co.’s having WarnerMedia’s rights.
He Thinks Discovery’s International Distribution is a HUGE Asset.
After stating the challenges HBO Max has faced, John Malone points out how well Discovery has been able to penetrate the international TV market. Managements ability to remain flexible on a country by country basis and offer different products/price points has been executed well. Malone believes that this will be applicable still with HBO in the mix.
The Balance Sheet Will Be Alright.
I got to be honest, this piece of the puzzle scares me a little (I don’t think I’m alone on this). Per the slide deck that the two management teams provided when they announced the intent to merge, leverage at close will be near 5x Debt/EBITDA. Malone added that 20% of EBITDA will go towards interest payments and the company should have 3% of annual interest expense on their debt. This assumes that they are able to maintain their Investment Grade status. John Malone mentioned in the interview that the rating agencies have confirmed that the combined co will be investment grade (by how much is not clear).
The Strategy Will Likely Mimic Discovery’s
Localized content will be the name of the game and will likely be distributed through both Ad-Lite and Ad-Free offerings depending on where in the world you live. The strategy seems to work well for Discovery, and I’m not sure there is a reason to believe it won’t work for the combined co just yet. One concern would be the structural advantage in advertising the Discovery enjoys; you can really target a specific audience via the content they watch. Will this effectiveness be transferable to HBO Max?
Surprise! There Will Be Revenue Synergies.
I personally don’t think this is all that surprising (and I think most who follow the space would agree). Combined Co. should be able to bundle and cross sell their “Ensemble of Services” globally, contributing to the top line. No guidance has been given on this and the track record of revenue synergies in mergers isn’t good, but I think it’s very possible here.
An Actual Surprise, Cost Synergies Won’t Come from Production Assets?
We should probably take this with a grain of salt (since it isn’t coming from the CEOs mouth) but Malone doesn’t think CEO David Zaslav will be finding the cost synergies on the production side of the business. I interpret this as, Management thinks that integration/changes to the production assets is a risk. I don’t think we can draw a ton of conclusions from this just yet, but I will certainly be keeping an eye on this aspect of the deal.
The Two Assets are a Great Fit for Each Other.
John Malone said of Discovery, “… does customer satisfaction very well but lacks the big acquisition content…” (I am paraphrasing a little here FYI) while WarnerMedia is able to produce big blockbusters that get new users to sign up. Add those two together and you COULD have a very formidable competitor in the space. And I would agree, I think there will be some great opportunities to capture value given the combined set of assets.
Obviously, there is a lot more to unpack from this interview than what I’ve touched on but these are just a few things I found interesting. I really do look forward to learning more about this deal. I think the entire media space was already an awesome case study into competition between firms and with the announcement of this deal, I think it gets even better.
Interview Link: CNBC Interview