How Will the WarnerMedia-Discovery Merger Impact Comcast?

Comcast’s stock dropped 5.5 percent on Monday. The reason: the mega-deal unveiled by Discovery and WarnerMedia parent AT&T that is set to merge their content businesses.

Wall Street analysts and watchers said the marriage announcement caused some investors to worry about the fallout for Comcast and its various businesses. Some, for example, expressed concern that Comcast could make an expensive counter bid for WarnerMedia to merge it with NBCUniversal as several analysts have in recent months suggested.

Others noted that the deal will leave Comcast as the only company that still believes in the benefits of vertical integration, meaning owning both content and distribution businesses, on which AT&T has now thrown in the towel. But can it make it work better than other companies?

A few analysts debated the impact the planned bigger competitor could have on Comcast’s entertainment arm NBCUniversal and its Peacock streaming service, as well as the future of WarnerMedia-owned HBO’s output deal with Comcast’s European pay TV giant Sky. And others wondered if a more focused AT&T would invest more into strengthening its broadband service offerings, which could eat into a key growth area of Comcast Cable.

While there are a range of possible concerns, several analysts have come out in Comcast stock’s defense, arguing its drop went too far.

“Comcast oversold on the news,” wrote Doug Mitchelson of Credit Suisse, which has an “outperform” rating and $67 stock price target on the conglomerate’s stock, for example. His report noted that “the #1 investor question we received [was related to] concerns this deal would push Comcast to scale up their NBCU media presence via further media M&A.” He highlighted though that “Comcast management has been clear about their lack of interest in M&A near- to mid-term, nor do we expect management believes acquiring a major media company with meaningful U.S. linear network exposure in an attempt to pursue global streaming to take on Netflix is a smart strategy.”

Mitchelson said that Comcast executives said last fall that they were not necessarily interested in buying or selling media assets outright, but were open to potential joint ventures. “We would be surprised if Comcast did not study WarnerMedia joint venture structures and already chose not to pursue such a deal,” he concluded. Comcast has not commented.

But other on the Street shared his take on the situation. CFRA Research’s Tuna Amobi told THR that “Comcast’s NBCU and ViacomCBS might understandably be open for potential M&A opportunities” after the big Discovery-WarnerMedia deal, but noted they were “arguably not an immediate strategic imperative for their respective streaming platforms.”

And MoffettNathanson’s Craig Moffett added: “There is obviously a fear that Comcast will either enter a bidding war for HBO, or will go after some other asset, like ViacomCBS, to keep pace. My own view is that they won’t do either one.”

The Benchmark Company analyst Matthew Harrigan in a Tuesday report reiterated his “buy” rating and $70 price target on Comcast, also calling Monday’s selloff “excessive.” But he acknowledged that “the Discovery-WarnerMedia tryst does increase pressure on Peacock advertising VOD execution and poses special European challenges for Sky.”

Going into more detail, the analyst noted the planned debut of an HBO Max advertising-supported service at a lower $9.99 price point. “The new Discovery-WarnerMedia’s melding of scripted shows, international and U.S. sports and news closely mirrors Peacock’s programming approach,” which thanks to Discovery’s global reach would likely become a worldwide strategy, he argued.

But Harrigan suggested Comcast could look to beef up its position in foreign markets further if it feels the need. “With details for a global Peacock rollout to emerge later this year, Comcast could plausibly ramp its overseas content ownership through more in-house development or focused M&A,” he argued.

Sky in particular has continued to expand its original programming investment, which Comcast has further accelerated. But the key content deal with HBO for its Sky Atlantic network has caused some debate since Monday’s mega-deal news. “Sky is vulnerable to having Sky Atlantic dependent on HBO for about 40 percent of its programs,” Harrigan wrote. “Sky has an output deal with HBO that runs to 2025, concluded two years prior to the HBO Max launch. This prevents HBO Max from launching in U.K., Germany or Italy until 2025, but the pact almost certainly will not be renewed.”

One observer noted though that Sky has a leading position in key European markets, making it an important partner for many content players. And it has continued to increase its original programming, such as Chernobyl, which was a Sky production with HBO. Sky has also pursued the strategy of being a top aggregator of content, meaning it is not as dependent on one output deal as in the past.

Ian Whittaker, a London-based former analyst argued that exactly because Sky is the big established pay TV player in such markets as U.K., Italy and Germany, the Discovery-WarnerMedia deal is making investors wonder again about its future role. “How does Sky fit into Comcast’s global streaming strategy?” Whittaker asked. “This was a question before the AT&T-Discovery deal, but is likely to be brought into greater focus following the announcement. One obvious route would be to have Sky spearhead Comcast’s European streaming push, with its branded streaming services (Peacock and Hulu, in which Comcast owns a minority stake) operating ex-Europe, but that risks confusion, potential conflict over rights as well as undercutting the viability of its entire streaming strategy.”

Could Comcast maybe even sell Sky after buying it in 2018 for $39 billion? “That is another option, but it is unlikely it would receive anywhere near its purchase price,” Whittaker said. He also argued that the combination of Comcast’s assets has worked “decently well.”

One media investor who didn’t want to be named argued that Comcast’s cable systems, Sky and NBCUniversal have been working together really successfully, including Peacock using Sky technology and personnel, and wouldn’t want to give up on their sharing of know-how and resources as media and telecom firms increasingly battle deep-pocketed tech giants.