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Discovery, WarnerMedia merger likely to pass regulatory scrutiny – analysts

Less than three years after AT&T Inc. won a hard-fought battle to acquire media company Time Warner, AT&T wants to cut its media division loose — and analysts expect regulators to be OK with that.

While AT&T's plan to combine its Warner Media LLC entertainment, sports and news operations with lifestyle network owner Discovery Inc. to form a new stand-alone company is likely to face scrutiny from U.S. regulators, media analysts say they ultimately expect the deal to win approval in time to close next year as planned. By contrast, it took AT&T about two years to close the original deal to acquire the Warner Media assets.

According to analysts, the difference this time is that Discovery is more of a niche player in the TV marketplace, and the newly created media company is likely to add more competition to a streaming video market that, while growing, is still dominated by a handful of companies, including Netflix Inc. and Amazon.com Inc.

Peter Supino, a vice president and senior analyst with AB Bernstein, said the Discovery-WarnerMedia transaction will certainly be "heavily scrutinized," but "any excuse for blocking the merger will be very weak."

That is primarily because Discovery is a relatively smaller media company, with lifestyle networks such as TLC and HGTV that "just aren't politically sensitive," Supino said. Discovery's reality content is also not a driver of cost inflation in programming like news and sports, Supino added.

"In the reality segment, you're talking about a smaller niche that has nothing to do with the free dissemination of information," Supino said.

If anything, antitrust scrutiny could delay the deal, Supino said. But he noted that executives appear to be planning for that possibility by guiding toward a 2022 close, leaving some "cushion for regulatory review built into that."

Still, the proposed deal would create a large organization combining AT&T's Warner Media's news and entertainment assets such as CNN, HBO and Warner Bros. film and TV studio offerings with Discovery's nonscripted lifestyle programming.

Combining content assets presents a "monopoly issue" for content creators, whose bargaining power has gradually eroded through previous mergers in the content markets including, film, cable and network, said Diana Moss, president of the American Antitrust Institute, an independent nonprofit devoted to promoting competition in the marketplace, in an May 17 email message to S&P Global Market Intelligence.

"Any horizontal overlaps would need to be examined carefully, especially in regional markets," Moss said.

Tuna Amobi, media and entertainment analyst at CFRA Research, said he believes that the deal has more than a 50-50 chance of approval, especially if the companies focus on the deal bringing new competition to the streaming market. Together, the content offerings of WarnerMedia and Discovery would be "broader in scope and demographically appealing," Amobi said.

The deal would also offer more competition from a cost perspective, Amobi said. HBO Max is currently priced about $1 higher than Netflix's standard U.S. plan, but pricing on a bundled offering of HBO Max and discovery+ could be a more competitive lure for consumers, he said.

"It's all about presenting consumers with more choices," Amobi said.

AB Bernstein's Supino said he believes consumers would consider allocating more of their streaming budget to the combined HBO Max and discovery+ than either in isolation.

The idea behind the deal is to offer more things to more consumers so when they spend money on streaming video subscriptions, "the new company makes the cut," Supino said.