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Less than 50% of discovery+ subs are also HBO Max customers

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Less than 50% of discovery+ subs are also HBO Max customers

When Discovery Inc. closes its acquisition of AT&T Inc.'s Warner Media LLC next year, Discovery Inc. President and CEO David Zaslav said the resultant Warner Bros. Discovery "will appeal broadly to all demographics, young and old with strong male and female genres."

Discovery added 3 million direct-to-consumer subscribers in the third quarter to finish the period with 20 million, while Warner Media counted a combined 69.4 million HBO and HBO Max customers, up 1.9 million sequentially from the second quarter and 12.5 million year over year. Zaslav has previously pointed to having about 200 million global streaming subs within two or three years of the union.

In the U.S., the executive believes there is subscriber acquisition potential. "Assessing the overlap in respective subscriber bases, at least here in the U.S., we believe less than half of discovery+ subscribers are also HBO Max subscribers," he said on the company's Nov. 3 earnings call.

Zaslav called Warner Bros. Discovery "a combination of two companies whose common culture of creative excellence, iconic characters and franchises will result in a differentiated competitive offering ... the biggest and most compelling menu of [intellectual property] for consumers in the world."

The portfolio will span multiple genres: comedy, true crime, kids and family, lifestyle to adventure, drama and documentaries, news, sports and superheroes.

Zaslav also revisited previous remarks about the value of the ad-light products offered by discovery+.

"We gain confidence in the strategic direction from our experience with ad monetization on discovery+ in the U.S., where advertisers covet the incremental reach demos, targetability, and product flexibility, and pay premium rates to address this audience," the CEO said.

Warner Media CEO Jason Kilar said on AT&T's earning call last month that the ad-supported version of HBO Max, which debuted in June, has shown early promise not only in terms of customer sign-ups but because advertising helps lower the price for customers.

Wells Fargo analyst Steven Cahall wrote that he expects the integration of two companies and their respective streaming offerings "would support a streaming bundle initially, perhaps heading towards a unified service over the longer-term."

The deal is on track to close in mid-2022, Zaslav said.

Based on the latest operational trends, Zaslav said Discovery now expects debt leverage of 4.5x when the deal closes, down from original projections of 5x. Initially, Discovery projected the company would hit a 3x level about two years following the deal's finalization, but that could now occur "meaningfully sooner than what we articulated in May."

The remarks impressed Wall Street analysts, reminding them of a deal Discovery closed in March 2018.

RBC Capital Markets analyst Kutgun Maral in a note said the acceleration of the deleveraging targets at deal close and its earlier mid-2024 targets were perhaps the "most impactful update" Disovery could supply at this point of the process. "This is reminiscent of the Discovery-Scripps merger years ago where deleveraging and cost-synergy targets repeatedly came in ahead of plan, and we see scope for even further sources of upside with Discovery-WarnerMedia."

Discovery generated $3.15 billion in revenue during the third quarter ended Sep. 30, up 23% from the year-earlier period. Net income declined 48% to $156 million, due largely to higher costs, including those associated with airing the pandemic-delayed Tokyo Summer Olympics, as well as marketing expenses designed to support discovery+.