I’ve talked about Discovery a lot recently, and I think for good reason: the company is going through a >$100B mega-merger that has the potential to unlock enormous value.
"Two of those winners seem clear: Netflix and Disney. The rest, though, are very much up in the air, and while Discovery now has the cachet of HBO, it also has the blessing and the curse of its existing businesses. The blessing of the cable TV business is that it throws off cash, and Discovery, with the addition of WarnerMedia’s cable channels, should be able to squeeze the cable operators for an even bigger share of the shrinking pie; the curse is that the attractiveness of HBO Max will be proportional to the degree to which Discovery cannibalizes said cable business. Meanwhile, the blessing of owning studios is that Discovery has direct access to original content; the curse is the same one faced by AT&T originally, which is that making content exclusive, particularly to one’s own subscale streaming service, is value destructive."
I want to think that this blogpost will make its way onto a meeting at Comcast, eventually getting a topping bid for Discovery. And then years down the line we get a movie about this whole saga.
Turner doubling NBC's bid for the NHL is I think the key thing in this. The linear bundle is more sports (and news: broadly, "proportion of time 7-14 days from now where a linear channel can't tell you what frame they'll be showing") reliant than ever: If 30-40% of the linear bundle subscriber base in 2010 was mainly there for sports/news, it's almost certainly a majority now (possibly as high as low 60s) and that share will only grow.
So it's only a matter of time before someone (DirecTPG maybe?) decides that their only way forward is to super-serve sports/news (and maybe things like concerts? Could some combination with SiriusXM and/or LiveNation be in play?). $30-plus/month for linear ESPN as long as MNF/CFP/SEC/ACC/NBA playoffs are at least $10/event PPV (or just straight not available) on ESPN+, smaller payouts for the other sports/news packages. Content packages that don't have needle-moving live events either take zero carriage fee and hope to make it back on advertising or agree to a wholesaling arrangement for their streaming or go premium linear at the streaming price point (e.g. AMC+ through DirecTV).
So if Discovery (and, by extension, Malone) see this coming down the pike, then getting sports rights to keep the Discovery linear bundle going (a marketing channel for Discovery+ which itself generates revenue, after all), on top of getting buzzworthy shows for OTT streaming is the name of the game. They may well have told T that they were only interested if Turner added marquee sports rights beyond NBA/March Madness/MLB, because T had been de-emphasizing sports since the Warner acquisition (I suspect DirecTPG will go hard at renewing Sunday Ticket, despite T making it abundantly clear that they weren't interested) and then comes out of nowhere with the NHL (the only thing close to a marquee rights available).
On SiriusXM/LiveNation, Viacom making a play to merge with both might not be insane. Return MTV to music (in this case concerts)... meanwhile broadcasting events to the more premium National Amusements theater footprint could be useful for the Redstones.
That’s not how break-up fees work. Have a look at the termination rights in the DMA - where is DISCA entitled to get out of this? Note that the vote is locked up.
I'm not a lawyer but there are provisions for termination in connection with a higher offer, see "RMT Partner Superior Proposal". I think that's customary in these deals that the board can deem a new offer to be more favorable and terminate the existing merger agreement. I haven't read the voting agreements but can't imagine that would preclude Malone and board from carrying out their fiduciary duties being on the board of DISCK?
Section 10.4 - "Termination by RMT Partner" requires a "Triggering Event" - 10.4(a) Following a Triggering Event but prior to the time the RMT Partner Stockholder Approval is obtained.
A “Triggering Event” means the Voting Agreements or the provisions of this Agreement that obligate RMT Partner to hold the RMT Partner Stockholders Meeting are limited or invalidated for any reason, including as a result of a judicial determination"
In plain English, this means that unless you can get a court to throw out the voting agreement with Malone, there is no ability for DISCK to take an overbid. So, yes, the agreement is in fact written to preclude the exercise of the board's fiduciary duties unless the acquirer can get a Delaware court to say otherwise (to which, maybe - but it's a very high bar)
From today's Stratechery:
"Two of those winners seem clear: Netflix and Disney. The rest, though, are very much up in the air, and while Discovery now has the cachet of HBO, it also has the blessing and the curse of its existing businesses. The blessing of the cable TV business is that it throws off cash, and Discovery, with the addition of WarnerMedia’s cable channels, should be able to squeeze the cable operators for an even bigger share of the shrinking pie; the curse is that the attractiveness of HBO Max will be proportional to the degree to which Discovery cannibalizes said cable business. Meanwhile, the blessing of owning studios is that Discovery has direct access to original content; the curse is the same one faced by AT&T originally, which is that making content exclusive, particularly to one’s own subscale streaming service, is value destructive."
I want to think that this blogpost will make its way onto a meeting at Comcast, eventually getting a topping bid for Discovery. And then years down the line we get a movie about this whole saga.
Turner doubling NBC's bid for the NHL is I think the key thing in this. The linear bundle is more sports (and news: broadly, "proportion of time 7-14 days from now where a linear channel can't tell you what frame they'll be showing") reliant than ever: If 30-40% of the linear bundle subscriber base in 2010 was mainly there for sports/news, it's almost certainly a majority now (possibly as high as low 60s) and that share will only grow.
So it's only a matter of time before someone (DirecTPG maybe?) decides that their only way forward is to super-serve sports/news (and maybe things like concerts? Could some combination with SiriusXM and/or LiveNation be in play?). $30-plus/month for linear ESPN as long as MNF/CFP/SEC/ACC/NBA playoffs are at least $10/event PPV (or just straight not available) on ESPN+, smaller payouts for the other sports/news packages. Content packages that don't have needle-moving live events either take zero carriage fee and hope to make it back on advertising or agree to a wholesaling arrangement for their streaming or go premium linear at the streaming price point (e.g. AMC+ through DirecTV).
So if Discovery (and, by extension, Malone) see this coming down the pike, then getting sports rights to keep the Discovery linear bundle going (a marketing channel for Discovery+ which itself generates revenue, after all), on top of getting buzzworthy shows for OTT streaming is the name of the game. They may well have told T that they were only interested if Turner added marquee sports rights beyond NBA/March Madness/MLB, because T had been de-emphasizing sports since the Warner acquisition (I suspect DirecTPG will go hard at renewing Sunday Ticket, despite T making it abundantly clear that they weren't interested) and then comes out of nowhere with the NHL (the only thing close to a marquee rights available).
On SiriusXM/LiveNation, Viacom making a play to merge with both might not be insane. Return MTV to music (in this case concerts)... meanwhile broadcasting events to the more premium National Amusements theater footprint could be useful for the Redstones.
Great article. Been following your Discovery write ups religiously and excited to see how this all plays out
just sold DISCK Sept 17 puts @ $27.50 for $2 - to me this is dead money for a bit but happy to own at $25.50
Why would T let DISCK out of their agreement in the case of topping bid?
$720M break up fee but seems unlikely they wouldn't come back with a higher offer given how much sense the deal makes for T
That’s not how break-up fees work. Have a look at the termination rights in the DMA - where is DISCA entitled to get out of this? Note that the vote is locked up.
I'm not a lawyer but there are provisions for termination in connection with a higher offer, see "RMT Partner Superior Proposal". I think that's customary in these deals that the board can deem a new offer to be more favorable and terminate the existing merger agreement. I haven't read the voting agreements but can't imagine that would preclude Malone and board from carrying out their fiduciary duties being on the board of DISCK?
Section 10.4 - "Termination by RMT Partner" requires a "Triggering Event" - 10.4(a) Following a Triggering Event but prior to the time the RMT Partner Stockholder Approval is obtained.
A “Triggering Event” means the Voting Agreements or the provisions of this Agreement that obligate RMT Partner to hold the RMT Partner Stockholders Meeting are limited or invalidated for any reason, including as a result of a judicial determination"
In plain English, this means that unless you can get a court to throw out the voting agreement with Malone, there is no ability for DISCK to take an overbid. So, yes, the agreement is in fact written to preclude the exercise of the board's fiduciary duties unless the acquirer can get a Delaware court to say otherwise (to which, maybe - but it's a very high bar)