AT&T-Discovery Deal Would Create a Media Juggernaut

Less than three years after AT&T spent over $85 billion and millions more fending off a government challenge to buy Time Warner, one of the biggest prizes in media, the phone company has decided on a completely different strategy.

AT&T is in advanced talks to create a new company that would merge its media business, including CNN, with Discovery Inc., two people briefed on the deal said on Sunday. The plan would incorporate all of AT&T’s WarnerMedia assets, which include HBO and Warner Bros., one of the people said. The parties could announce a deal as soon as Monday, this person said, saying that the talks were not yet complete and final details were being worked out.

Should AT&T and Discovery agree on a deal, it would join together two of the largest media businesses in the country. AT&T’s WarnerMedia group includes the sports-heavy cable networks TNT and TBS. Discovery has a strong lineup of reality-based cable channels, including Oprah Winfrey’s OWN, HGTV, the Food Network and Animal Planet.

WarnerMedia is run by Jason Kilar, 50, one of the early pioneers of streaming and the first chief executive of Hulu. David Zaslav, 60, has been the head of Discovery for 14 years and helped it grow into a reality behemoth. It’s unclear who would lead the new business.

AT&T and Discovery declined to comment. Bloomberg News first reported on the possible deal.

The transaction would create a new company bigger than Netflix or NBCUniversal. WarnerMedia and Discovery together generated more than $41 billion in sales last year, with an operating profit of over $10 billion. That would have vaulted the combined company ahead of Netflix and NBCUniversal and behind the Walt Disney Company.

In other words, to compete for audiences increasingly glued to Facebook, YouTube or TikTok, media companies need to get even bigger. It could set off another round of media deals.

Both AT&T and Discovery have invested heavily in streaming to compete with Netflix and Disney. AT&T has plowed billions into creating HBO Max, a streaming platform that now has about 20 million customers. Discovery has 15 million streaming subscribers around the world, most of them for its Discovery+ app.

The merger would also be a significant about-face for AT&T, a telecommunications giant better known for servicing fiber lines and cell towers than producing entertainment and courting Hollywood. Industry experts questioned AT&T’s daring purchase of Time Warner at a time when cord-cutting was only accelerating. The spinoff indicates a failed acquisition strategy.

“AT&T didn’t know what they were buying,” said Brian Wieser, a longtime Wall Street analyst. “The strategy underpinning” the acquisition “was probably flawed.”

Mr. Wieser said AT&T deserved credit for slimming down WarnerMedia’s operations and putting money into HBO Max. Shortly after AT&T closed on the deal in 2018, the company quickly worked to consolidate the media giant’s various divisions, ultimately laying off about 2,000 employees. “They were genuinely reorganizing the business to give it the clarity to be able to compete with Netflix,” he said.

At the same time, AT&T is no longer best positioned to continue investing in its media business, Mr. Wieser said. The wireless giant is one of the most heavily indebted companies, with long-term debt topping $159 billion. That includes the $23 billion it agreed to spend in February to license additional airwaves for its 5G technology.

A rival cellphone carrier, Verizon, has been shedding its media assets as it, too, has had to invest in 5G technology. This month, it sold off Yahoo and AOL to a private equity group, not long after it sold HuffPost to BuzzFeed.

John Stankey, the chief executive of AT&T, has looked at its media business as a way to keep its phone customers glued to its cell service. AT&T Wireless subscribers get discounts and free access to HBO Max. A deal with Discovery could include stipulations that would maintain those benefits.

Before he took over as chief executive last year, Mr. Stankey was known as the company’s chief mergers strategist. But his track record has been spotty. In addition to planning AT&T’s purchase of Time Warner, he was behind the company’s $48 billion acquisition of the satellite operator DirecTV in 2015. The service has been bleeding customers for years; in February, AT&T sold part of the business to the private equity firm TPG for about $16 billion, a third of what it originally paid.

For Discovery, the deal could finally give Mr. Zaslav the size and scale he has long sought. A swashbuckling executive who can recall ratings figures off the top of his head, Mr. Zaslav represents the last of the old guard in media, a hobnobbing mogul known for hosting lavish get-togethers at his house in the Hamptons.

A combination with WarnerMedia suggests he may have had a recent change of heart about taking over CNN. In an interview in February with The New York Times media columnist Ben Smith, Mr. Zaslav said CNN wouldn’t necessarily make a good fit with Discovery. “News is very overplayed and excoriated here in the U.S.,” he said then.

Mr. Zaslav remains one of the highest paid executives in the country. In the past three years, his average annual compensation topped $70 million.

John Malone, the cable pioneer and one of the fiercest competitors in media (once referred to by Al Gore as “Darth Vader”), is one of Discovery’s biggest investors and a merger with AT&T would be a homecoming of sorts. Mr. Malone began his career at the Bell Labs division of AT&T before going on to become one of the biggest cable entrepreneurs in the country.

The deal could also benefit Advance Publications, the publisher of Condé Nast, as Discovery’s biggest shareholder.

The new company would create a new kind of media behemoth, one that is still living off the fat profits of old-school cable, while spending those profits (and more) on streaming.

Even with increased competition, HBO remains a standout in television, and last year, once again, captured more Emmys than any other network, studio or platform, including Netflix. It has several hit shows, including “Succession,” “Curb Your Enthusiasm,” “Barry” and “Last Week Tonight With John Oliver.” It also has a huge library that includes “The Sopranos,” “Game of Thrones” and “Sex and the City.”

The Warner Bros. TV studio likewise has produced successful shows for both its parent company, WarnerMedia, and outside studios with series like “Ted Lasso” (Apple TV+), “Riverdale” (CW), “The Flight Attendant” (HBO Max) and “The Bachelor” (ABC). The Warner Bros. movie studio recently released movies like “Godzilla vs. Kong,” “Mortal Kombat” and has big coming releases like “Dune” and “The Matrix 4.”

The disruption would extend to Warner Bros., the nearly century-old movie and television studio. It serves as a content engine for HBO Max while also making shows for networks owned by other companies, including ViacomCBS and Disney.

At the very least, senior Warner Bros. executives — caught by surprise by Sunday’s news — would have to endure another destabilizing corporate reshuffling; they had just started to get used to one put in place by AT&T.

There is also the question of how much producing Warner Bros. will continue to do for outside networks and whether its film-releasing strategy will again change. Since January, AT&T has been releasing all Warner Bros. films simultaneously on HBO Max and in theaters, with plans to return to a more traditional model — first in theaters for an exclusive run followed by availability on HBO Max — in 2022 for its biggest movies.

Discovery has long been known for its array of unscripted fare from its cable networks like HGTV, the Food Network, TLC, ID, Animal Planet and the company’s flagship, Discovery. The company introduced a new streaming service in January, built on the backs of cooking shows, nature shows and home improvement shows.

But perhaps Discovery’s biggest advantage is its huge footprint in sports internationally. It is the owner of Eurosport, and a combination with Turner would also give it space to run domestically. Turner has rights with Major League Baseball, the National Basketball Association, the N.C.A.A. and the National Hockey League.

CNN would also give Discovery a foothold into news, and Mr. Zaslav and CNN’s president, Jeff Zucker, are longtime golfing buddies.

Brooks Barnes, Lauren Hirsch and Andrew Ross Sorkin contributed reporting.