Checking Out the AT&T-Discovery Deal

AT&T (T -1.37%) has announced that it's merging its media assets with Discovery (DISCA). The result will be a streaming monster that includes HBO, CNN, TNT, TBS, Cartoon Network, TLC, Food Network, HGTV, and more. In this episode of MarketFoolery, Motley Fool analyst Jason Moser analyzes what it means for AT&T, Discovery, Netflix, and Disney, and discusses the latest news from AppHarvest (APPH), Twitter (TWTR), and Hostess Brands (TWNK).

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This video was recorded on May 17, 2021.

Chris Hill: It's Monday, May 17. Welcome to MarketFoolery. I'm Chris Hill. With me today, Mr. Jason Moser. Thanks for being here.

Jason Moser: Howdy.

Hill: We've got earnings to get to, but it is Merger Monday. [laughs] In a big way. AT&T is combining its entertainment and media assets with those of Discovery. The resulting company will be large and will have TV, movie, and streaming offerings with brands that you already know. HBO Max, CNN, TNT, TBS, Cartoon Network, combined with HGTV, Food Network, TLC, Discovery Plus. This is an all-stock deal. AT&T shareholders are going to own 71%; Discovery shareholders will own 29%. There are a bunch of things to get to, but what is your reaction to this deal?

Moser: Well, I mean, in the immortal words of the great Ron Burgundy, the first thing that came to my mind was "that escalated quickly," [laughs] because it doesn't seem like it was all that long ago that AT&T was really making their bets when it came to content and media. Just doesn't seem like that's really going to pan out. Honestly, I think that's probably the right decision. I think this really boils down to, ultimately, and this may just be a simplistic way of looking at it, but here you go. I think it really boils down to connectivity, and what I mean by that is as we see the continued rollout of 5G, as we spend the next decade watching all of the impacts from the buildout of these 5G networks, ultimately we're going to see 6G and so forth.

Really, this all boils down to connectivity, and I think for a while you have companies like AT&T and even Verizon divesting some of their content properties as well. I think these companies are trying to have their cake and eat it, too, maybe a little bit. But I think that it became a little bit more clear here that they recognize they need to really focus and double down on what they do well first and foremost, which is connecting people. 

Ultimately, I think this is a sensible move, because we're saying Merger Monday, of course, and with that merger, we're also talking about divestiture, and I think this will give AT&T a chance to really focus on what they do well. At the same time, I think it will create a very compelling media company with a lot of valuable IP. I'm interested to see how this develops.

Hill: I am, too. Before we move off of AT&T, I think it's worth pointing out, John Stankey, the CEO at AT&T, he's been an executive of that company for almost a decade, and this move, among other things, is an admission that the $85 billion acquisition they made in 2018 was a mistake. He was talking this morning on CNBC about, well, the landscape changed, I get that, but this is also an admission that this has not worked at all. They are trying to deal with the enormous amount of debt they have in their balance sheet.

In terms of the resulting offering, David Zaslav, the CEO of Discovery, boy, he is not lacking for confidence when he talks about [laughs] this result, that he is saying, "We've got the best media IP in the world; we're going to be the No. 1 media company in the world." Predicting 400 million direct-to-consumer homes that they're going to be in. That is a lofty goal, but [laughs] that's going to be interesting to see how close they get to 400 million.

Moser: Well, I do agree that they have a very compelling collection of media brands. That to me is really the most attractive part of this, is the potential, because of all of those different brands. Generally speaking, you look at a business like Netflix, for example. We've followed Netflix really forever, and it's always been this push and pull between the number of subscribers that Netflix continues to sign up. It's just astounding. On the flip side of the coin, the amount of money that they spend on content is equally astounding. I've never been all that impressed with Netflix's content. I understand they are building that stuff out and trying to come up with ownership of their own IP. I think this really speaks to the value in well-established IP. 

When you look at all of the different properties that are going to be under this one umbrella, I can see a lot of different ways they can succeed. Ultimately, they're going to have the bank account to spend on the content. Not only do they have a ton of content already out there, but they are also going to have the pockets to continue to invest in that content, to really scratch a lot of [laughs] different itches. They're going to be able to cater to a number of different types of consumers with all of these different channels, so to speak, all of these different media properties, all these different shows. They're going to be able to reach a very wide demographic. l like the potential there. 

On the flipside, honestly, I like that this gives AT&T a chance to focus more, really, on building out their network. I know we talked about this several weeks or months ago, but recently, the FCC had announced the winners of this $81 billion auction for this 5G bandwidth and for this 5G spectrum. When you look at that $81 billion, Verizon was the big spender, spending around $45 billion. But AT&T spent close to $24 billion in that bid. That's something that's going to continue as well. They're going to need to continue to invest in the spectrum, in capability, in infrastructure to be able to continue to deliver all of this data. All of this stuff ultimately gets back to that word I was talking about at the very beginning: connectivity.

I think that sometimes we talk about how divestitures or splits can be value-creating. I do see in this case, I think there's a lot of potential here for this to create value on both sides of the equation, because if you look at the last five years, for example, AT&T and Verizon together, investments in those two businesses would have made you some money. But they're certainly not lighting the world on fire, and the market has outperformed them handily. Maybe this trend we're seeing with Verizon and now with AT&T, this is going to give me a chance to get back down to brass tacks and focus on doing what they do best.

Hill: Lastly, I'll just say when asked if he has any regulatory concerns about this, John Stankey said no, and I think he is right about this. I have a hard time seeing this deal being stopped. But just sticking with concerns for a second. I think if you're Netflix or Disney, I don't think at this moment you are particularly concerned about this because Zaslav and his team have so many things to figure out, including, by the way, how they're going to sell this. Are they going to bundle it? Is it going to be one offering? Is it going to be more like a Disney situation where they said, "Oh, we've got Disney+, we've got Hulu, we've got ESPN+." In the short term, anyway, I don't think if you're Netflix or Disney you're overly concerned about this development.

Moser: Totally agree. If I'm an investor in Netflix or if I'm working in the executive suite at Disney, this is something you keep on your radar, but you don't look at something like this is a Netflix killer or Disney killer. We talked about this a lot, obviously, when Disney was announcing Disney+. It's one thing to have all that stuff; it's another thing entirely to figure out how to package it and distribute it. I think that's going to be really the big challenge here going forward for this new combined entity, is, it's figuring out how to package it and how to distribute it in such a way that it really shines the light on all of the different content you have yet keeps it simple. That's a very difficult balancing act. We've seen Netflix has done a tremendous job at it through the years. Disney, I think, is figuring it out as well. That will be something to certainly keep an eye on with this newly combined entity.

Hill: Let's move on to some earnings. It was a mixed first quarter for AppHarvest, the agriculture tech company. Revenue was in line with expectations, but the loss for the quarter was solidly more than expected. Shares are up 11%, and on the surface, you can ask why, but something you've talked about before about AppHarvest is you think this is one of those companies that is skating to where the puck is headed.

Moser: Absolutely. I'm glad you said that. I feel like this is a company that is still under most radars. But I think it's going to be a company that's going to become more well known here in very short order. Part of that, I think, is because of this burgeoning ag-tech space. We always talk about fintech and stuff like that, but ag-tech really is a thing. Even on the call, founder and CEO Jonathan Webb said very clearly, "We're a technology company working to disrupt agriculture." He refers to themselves as farmers and futurists. This is really the marrying of what we know is a traditional agricultural boring business, and it's bringing the tech into it, which is just very cool to see the potential there. We've talked before about the value in the controlled environment agricultural, CEA. 

The bottom line is they're figuring out ways to utilize technology to develop a more sustainable and reliable food system. AppHarvest is one of the companies really focusing on doing that. They're growing fruits and vegetables, primarily tomatoes right now. But that is expanding out to things like cucumbers, leafy greens, strawberries, etc. They've developed not only a very good system, but they've developed a very encouraging pipeline of activity with additional facilities that they're going to be rolling out here in the coming years. Right now, focusing on five operating farms by the end of 2022, they believe they're still well on track for 12 farms by the end of 2025.

This is just a company -- it came to the public markets far earlier than it probably would have 10 years ago. The capabilities there for these companies to come earlier to the market via SPAC, and that's got it puts and takes. It's not going to be lobbing up the most astounding revenue numbers, I think, in the near term. I think they're talking about around $25 million in total revenue for 2021 altogether. That doesn't sound like it's all that much, but you also have to remember, this is a company that came public a lot earlier than it probably would have otherwise. I think it's about focusing on the future, trying to figure out what our future looks like as far as agriculture here goes. 

I think you look to that recent route -- AI acquisition, artificial intelligence, robotics, that's a very telling sign of where AppHarvest seems to believe it's heading. I think a lot of other companies are following suit as well, as a controlled environment, agriculture continues to grow. All in all, very encouraged with the quarter, very encouraged with the future of this business. It's just one of those ones where you have to be really excited when you see companies like this out there.

Hill: Real quick before we move on with earnings. Over the weekend, there were reports on a new subscription service that Twitter is working on called Twitter Blue. [laughs] The company didn't confirm anything, but the reports are this is $2.99 a month. It will offer new features like editing. The speculation is that it could lead to a tiered subscription model. I'm curious, and again, Twitter hasn't confirmed any of this, but based on what you've seen of this, what is your reaction?

Moser: It feels like [laughs] it's 10 years too late. I feel we were talking about this potential way back when Twitter first came public. I guess better late than never. But by the same token, I really have a hard time believing they would find a meaningful number of people that would pay anything for the service. That's not really to say that Twitter is a bad service. I think it's a valuable service in some cases, but you've already groomed everyone who uses it to not pay for it. They've got a big challenge in bringing in new users because you start to wonder what the future of social networking looks like, of information networking looks like. We're seeing Facebook is starting to lose its luster, so to speak. Therefore, you see the importance of the Instagram acquisitions. Twitter, I think, is at the point too, where, trying to figure out what's next. I certainly don't fault them for trying this, if they do indeed try it. I just feel like it's a little bit too late. I don't know. It really feels like they could have tried this a long, long time ago, but time will tell. It's an interesting idea. I just don't know that it's something that anyone will really pay for. I know I certainly wouldn't, but I'm not saying that means nobody would.

Hill: Yeah. I think based on just what's come out so far, it doesn't seem like that compelling a value proposition. Now, the resulting product could be, but we'll wait and see.

First-quarter profits and revenue came in higher than expected for Hostess Brands. I'm not saying this is a stock for the great reopening, but when you look at how they break out their sales, Hostess got a nice boost this quarter on the go segment, which is basically convenience stores.

Moser: Yeah. The convenience stores and the dollar stores, they talk about that. They mentioned, then released the meaningful market share expansion. Gained a bit more than 3% of market share in the convenience channel. Almost 8% of market share growth in the dollar channel. They cater obviously to a very specific store demographic, and you see them in all of those convenience stores. There's some nostalgia there for a lot of these Hostess products. I think Twinkies is probably the first one that comes to mind. That's their ticker, I think, TWNK.

This is like Verizon and AT&T. If you invested in this business five years ago, listen, you're not throttling the market by any means, but you know what? You're making money. That's pretty believable. When you look at a business like this, they grew their top line 9%, and a lot of that strength was from Hostess. But if you remember, just at the beginning of 2020, they closed on another acquisition, a company called Voortman Cookies. That's, again, just one of those Voortman-branded products you find in the convenience stores everywhere.

But Chris, I don't know if you knew this, but in doing some research, apparently cookies are a little bit higher margin than Snowballs. Who knew? I didn't know, but now I do, and so I understand at least the rationale behind the acquisition. It does seem like the two brands together, Hostess and Voortman, are working well. It's a company that we love to have fun with as we cover it, but I think it's also really worth noting that they continue to do OK. Listen, you're gaining share, you're profitable, you're growing your top line, you've got tasty treats. What's not to like?

Hill: Well, it's like we've said forever about Coca-Cola and Pepsi is, the key to these businesses is their distribution network. If you're Hostess, you're this established brand, bringing a cookie product that has higher profit margins and just seamlessly pulling them into your distribution. Yeah, that can work out.

Moser: Well, and imagine all of the convenience stores and the dollar stores, for example. Just a picture in your head, how many of those convenience stores and dollar stores are all around our country? Then imagine that you run one of those stores, or imagine that you are a franchiser that runs a number of those stores. How nice is it to have such a reliable set-it-and-forget-it inventory line that you know you're always just going to be stocking your store. You don't have to overthink it. It's just like, "Listen, give me some Ding Dongs, some Twinkies, [laughs] some chocolate chip cookies, maybe a couple of Snowballs. I want that on an ongoing basis." From a business owner's perspective, it's probably pretty darn convenient to know the stuff exists because you're going to sell them, and it doesn't take a lot of work to keep your store stock with them. I certainly understand the value proposition.

Hill: I'm going to have to go for a walk this afternoon and find some Ho-Hos. [laughs] Jason Moser, great talking to you. Thanks for being here.

Moser: Yes, sir. Thank you.

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.