WHEN: Today, Monday, May 17th
WHERE: CNBC’s “Squawk on the Street”
Following is the unofficial transcript of a CNBC interview with AT&T CEO John Stankey and Discovery CEO David Zaslav on CNBC’s “Squawk on the Street” (M-F 9AM – 11AM ET) today, Monday, May 17th. Following are links to video on CNBC.com:
All references must be sourced to CNBC.
DAVID FABER: It is certainly the news of the day if not a lot more than that AT&T announcing it will be merging its Warnermedia unit with Discovery. And joining me now first on CNBC is David Zaslav Discovery CEO, and John Stankey, CEO of AT&T Gentlemen, it is great to have you this morning and I certainly appreciate it. John, I’m going to start with you and the soon to be most powerful man in media just stand by, but I want to start with a couple of questions of you, John, you know, I’m going to use the word bold I think you’ve been amazingly bold in your what 10 months or so in the job or maybe almost a year and the job at this point but it doesn’t always mean being bold is is being right. You know it’s less than three years since you closed the Time Warner transaction you had a fight like heck to get it done over a two year period cost your shareholders $107 billion. When you include debt in that deal so why reverse course now?
JOHN STANKEY: David, like, you know, things have changed a bit since we did the transaction and despite the fact that you know we are doing this relatively quickly, shareholders have still done reasonably well with this decision I think when you look at, you know the cash flows that we generated during that period of time. Look at asset sales we’ve made and, you know, frankly, I have an incredible degree of confidence that David’s gonna do a wonderful job running this business and as soon as we put this equity out there. We’re gonna see the natural re-rating that we intend to see in fact I think you’re seeing that in the stock this morning where, you know, our shareholders are enjoying the run up in the Discovery stock right now, given the fact that they’re going to go own 70% of this new equity so you know I feel by and large frankly that while we’re reversing course so to speak, or adjusting our approach right now. It hasn’t been without the hard work of a lot of people who have built a really interesting franchise that I think is why David sees a compelling reason to put these together, and why now, it’s because we were able to break through and get a domestic direct-to-consumer business off the ground with a great subscriber base. We, you know, have had a fantastic year. The team’s done a wonderful job and making that happen. And the reality is we now have in front of us is great opportunity to scale this globally and create a tremendous amount of value, and in order to do that, we need the equity to line up with the right shareholder base that wants to take that ride, and is willing to put that kind of a multiple on it, and if I step back and think about where we initially started this, which was to drive value into our conductivity services at AT&T. As I shared with you before, we’ve seen some really good progress on things like churn and customer acquisition, but the benefit of that is out scaled right now by this global direct-to-consumer opportunity and I think I owe it to the shareholders of AT&T to let this dog hunt and let it scale the way it should.
FABER: Okay. David Yeah, go ahead.
DAVID ZASLAV: Yeah, look, I think the very simple mission here is not just that we’re better together in the media side but that we’re probably the best media company in the world with the greatest IP the most iconic IP Batman Superman, Wonder Woman Sex in the City Entourage. Game of Thrones, and this idea of a full on global IP company, and the ability to to take 71% of, of the AT&T shareholder base. And together, really assure that that Warner together with Discovery will be a really strong global force but also that the vision for John and I was the number one, telecommunications, media company in the world, and the number one media company in the world. And that’s the mission that we’re both on and I think we both now have the tools to accomplish it.
FABER: Yeah, well let me, let me follow up on that though David because of course all those things you said may very well be true but, you know, we’ve also talked about the declining cable universe, I don’t know if it’s going to have 60 million homes or 50 million homes or below that, but, you know you’re running a company whose assets in terms of those cable networks are in decline in some way, you compete against the likes of Netflix which is going to be spending $18 billion on direct-to-consumer content, and you’re gonna have $55 billion dollars in debt. I mean, things can go the wrong way to David what gives you the confidence that they won’t.
ZASLAV: Well first, by 2023, we’ll be generating over $14 billion in EBIT, and over 8 billion dollars in cash. This company is going to be a free cash flow machine. We, we’ve acquired Scripts we acquired Eurosport we’re a big player in Europe and free to air, we have a good sense of the synergy that we can get we see over $3 billion in cost synergy alone. And we think there’s some real revenue synergy opportunity here. So, the metrics of this business up compelling. And if you look at the traditional business it solidifies us, we’re now, we’re the leader in nonfiction, which is the which is a huge piece of the bundle. And on top of that we’re now the leader in news. So we have news, sports, and nonfiction, we’ll be able to super serve advertisers. I think the will help the cable operators drive and drive the, the bundle itself which I think might be helpful to them, right, but most importantly, you know, right now we’re spending this business that John and I are creating together is $20 billion of content today, and we’re going to execute on that synergy, but we’re going to spend more money on content.
FABER: Right, but that’s not all for the direct-to-consumer platform I mean that’s for everything right that’s sports rights, that’s everything you’re doing that for the cable universe.
ZASLAV: That’s, that’s everything but it’s what we own the full ecosystem and Netflix is a great company, Disney is a great company but we have a portfolio of content that’s very diverse, and broadly appealing we think it could be 2, 3, 400 million homes.
FABER: 400 million? You really think you can get to 400 million direct-to-consumer homes?
ZASLAV: There’s billions of people out there that we could reach in the market. You know, today we’re almost 100 million to start. And so, the other thing that we have that some of those companies don’t have is John built the best – and enhanced and has been investing in – the best TV production company in the world. The one – if not number one, number two motion picture studio in the world. So, it’s great, great IP, and you know the courage that John showed – the reason that we can do this deal today is – and I went and looked at doing a deal with HBO five or six years ago.
FABER: Right.
ZASLAV: And most of the content that was on HBO – and it wasn’t a bad strategy, but it was sold in every country to free to air channels or to cable channels, and then that economics was used in each year for return to shareholders. John had the vision to say – and you see it in, HBO two or three years ago was making $2.4 billion. Today it’s not making anything. But it’s dramatically more valuable, because when we come together, all the IP is there. Game of Thrones is there, Sex in the City is there. When I looked at that business five years ago about doing something together, all that content was sold. And so John had the vision and the conviction to get that content back and build an amazing tech stack, which is complimentary – which there is huge synergy with us on — and over the last three and a half years he’s been at work on that. When you put us together now and he hands it to us. Off we go.
FABER: I want to get to that. John, you know, in particular, I want to get to the sort of the idea of why it’s David that you have the most confidence in. It’s certainly possible to imagine there might have been other partners for WarnerMedia once you made the choice to spin it off. Why is it this deal as opposed to perhaps another one and why is it Zaslav as opposed to some other executive that you have the confidence in to deliver for your own shareholders?
STANKEY: That’s because he’s really good for one. I think I’ll start right there. And he has a tremendous track record in terms of what he’s been able to do at Discovery and I think we have a shared point of view of where this business is going. And as a result of that, that continuity is really important when you’re right in the middle of a heavy investment cycle and looking to execute. And David, you know, I’m not going to go into every permutation or every consideration but you can assume that if you do something like this as significant as it is, that all options are weighed. Whether it’s a combination or are there other approaches to capitalizing the business or exposing value to give yourself the latitude and the flexibility to attract capital in the right way. And I will say that, you know, the board, myself, the executive team have been incredibly diligent looking at that and I think it tells you that this is the right one after looking at tons of options, it’s the right one because of the complementary nature of the content with very limited overlap in the content work we do, which I think is great for the employees. It’s great for the customer based on the breath that we’re going to have because everybody keeps moving forward. It was the right construct in terms of generating some synergies and scale that David talked about. It was a great way for us to do a big cut of the capital structure within AT&T to get it right so the communications company can in fact grow and we can invest appropriately. And, you know, my job is to make sure this came out on balance right for the AT&T shareholder and aggregate and I think we did that here and I’m really pleased about that.
FABER: Let me take that a step further then. I mean what is going to allow AT&T to do that you were not going to be able to do under the current ownership of Warner?
STANKEY: So what we’ve clearly been able to do is you know, number one, there’s been some overhang on our equity that’s been driven I think by the balance sheet dynamic and we closed this and we’re going to accelerate our deleveraging of the business and I believe that acceleration of the deleveraging of the business, given the strong results that we’re turning in in the communications company, will actually reward shareholders with probably a multiple tick on that as a result of that improvement. Second of all, as you’ve seen, we kind of have a package deal here around how we’re not only giving the shareholders an interest in a fast growing and very attractive and powerful media company, but we’re also going back continuing to maintain a very, very hearty and healthy dividend and the top 95% of dividend payouts. But we free up some cash flow that allows us to uptick our investment in what we’re doing around fiber in the wireless network and some very attractive returns in the high double digit, you know, teens, that allow us to go and start to take that, you know, lower yielding dividend and put it back to higher yielding growth in the business.
FABER: Is that how people should view it John? Because I know you’re targeting a dividend payout ratio between 40 and 43% on anticipated free cash flow of 20 billion. Obviously that’s a lot less than you spend on the dividend right now, to your point, your capital structure is going to be quite different, but how should shareholders view it? Because it does appear certainly you’re cutting the dividend.
STANKEY: What we’re doing, David, is we’re taking our cash and we’re putting it toward the highest return. And it’s not to be unexpected that when we shift out as much of the cash flow as we do with the media company transaction, what we’ve done with the Direct TV transaction, that we’ve resized the dividend as a result of that. But more importantly, using that cash flow to something that we know we can generate really attractive returns far in excess of, you know, the five-ish percent yield that maybe the dividend returns is the right thing to do for shareholders. And we want this business to grow organically and that’s my goal and objective.
FABER: David, I want to turn to you as well for, you know, what your expectations are for this new colossus that you’re going to be running, you know, it’s going to take at least a year to get approvals, one would expect. I want to ask about that as well. But are you concerned about a talent drain? We saw some of that at Disney, Fox when Disney was acquiring Fox. And obviously also followed it up with thousands of layoffs. I mean that synergy number you’re talking about, I would assume will include some job losses. How are you going to plan to keep people that you need to in obviously a creative business?
ZASLAV: Yeah, well look, we’re a creative company. With us, it starts with getting the best people in front of the screen and behind the screen and there’s really wonderful people at Warner, a lot of them are complimentary to us. We’re not in the scripted business. They have the biggest and most successful TV scripted business. They have, they have Warner Brothers Studios, which is, which historically is the place that’s most friendly to talent. And so, what my job is, you know, and our track record, if you look back at Scripps, more than half of the people that are, that are reporting to me and in our company right now are great leaders that would develop at Scripps. We want the best and the brightest. We’re going to create great performance economics and they’re also going to know that this company has a chance to really be a force.
FABER: And what does that mean what does that David? What does that mean to be a force? What, what do you mean when you say that?
ZASLAV: We start with the most compelling IP in the world. We also have content in every language in the world. We’re the leader in sports, we have all the tools to nourish people all over the world and we’re going to invest substantially more in content. We’re going to get synergy; we’re breaking the company in half effectively. The content is to the right. That’s the future of this company, invest in the creative and I think we’re gonna get that message out. John is continuing to invest in his business, we’re continuing to invest in ours, but we want the best and the brightest from Warner to be with us, and I think they’re going to buy into this vision, we have a chance to really be a global force. Those stories could be seen everywhere in the world in every language on every device and what great creative leader, a storyteller, doesn’t want that.
FABER: Understood. You know, silos I wonder it feels like we were starting to silo everything because all the producers of content are producing it for their direct-to-consumer business. Warner produces I think still plenty of stuff for other platforms. Will that continue or is most of what comes out of Warner now going to be only seen on your direct-to-consumer?
ZASLAV: Well I think that John created a, an environment that allowed him to get J.J. Abrams and some of the best creative people in the world and what he did was to say, you’re not going to be a captive unit. So, the start was we have to have the very best producers, writers, talent working with us and they want a chance to have their content appear in other places and so right now it’s, it’s working extremely well. When we look and John and I have talked about what’s the right mix? How much should be on our platform globally, how much should be produced for other competing platforms, but it’ll be driven by maintaining the best creative talent in the world telling the best stories because that’s how we’re going to be successful.
FABER: John, you’re no stranger to regulatory concerns. Do you have any here? It’s a big deal it’s certainly going to get some scrutiny even though wouldn’t appear on the face of it to have any competitive aspects.
STANKEY: Sure, it’s gonna get scrutiny David, you know, of course has to go through review so therefore it gets scrutiny. I don’t have concerns. I, you asked the question earlier around why this transaction, clearly one of the reasons is we think it’s a real clean approval process. And it’s important to have deal certainty which we think we’ve engineered with this contract and part of deal certainty is to have a nice clean regulatory process and we think we’ve got a real good shot at making that happen. And that way we can move through it quickly and let David and the new team get on with doing the good things they need to do in the market.
FABER: Yeah. Speaking of the market, David, how are you going to market HBO Max and Discovery? Do you know yet? Are they going to be put together in one offering or do they stay separate?
ZASLAV: You know we have plenty of time to figure it out. Iger and Chapek have done a bundle. They’ve been very successful with it. Right now, John and Jason are doing kind of a super, super product and that’s doing really well. We’re experimenting with different ways of doing Discovery Plus it throughout Europe and, and, and here in the US we have a very low entry price, and so we’ll just have to figure it out. The, the super exciting thing is just the content ecosystem that we have. When you put it all together, the motion pictures, the largest library in the world, and put it together with all the content and characters that we have and the challenge is just how do we do it? Do we do it with two products, three products, do we, do we do a bundle, do we put it all in one and how do we price it?
FABER: Aren’t you kind of recreating the cable bundle in a way? Isn’t that what’s going on here with all these platforms?
ZASLAV: Well we’re, I’ll say this, between news, sports, and the great entertainment and nonfiction that we have, we have an ability to create a tremendous amount of excitement and nourishment for any viewer so I think that’s going to be the basis of our success.
FABER: John as I probably remind viewers to their annoyance I’ve been doing this for a really long time, so long and I can remember when the old AT&T bought TCI only to sell it to create the broadband business at Comcast, when they were over levered. And then of course I can remember your predecessor buying DirecTV and then Time Warner, in how should we view these things, you know, that’s the new AT&T so to speak, but are you guys done? Are you going to be a pure play wireless company so to speak for the rest of your tenure at the very least, can you guarantee that?
STANKEY: You know what my tenure is and then maybe I can answer that question.
FABER: This deal might have something to do with that. I don’t know, yeah.
STANKEY: Probably that’s why I asked the question. David, I think what I would can tell you is this, we need to be the best conductivity broadband company that’s in the United States and that’s my goal and objective and got the management team orienting themselves and focused on that issue. And I believe to be successful in markets today, you have to have a really exceptional product and we have a journey in our company to make our products really exceptional and make our customer experience really exceptional when I feel like we’ve accomplished or we’re on our way to achieve that objective, we can always talk about maybe what’s next, but right now, our focus is on making sure we’re the best broadband company in America.
FABER: All right. Are you disappointed at all? Your stock is doing fairly well but the Discovery stock is, is actually back to flat on the session.
STANKEY: Well, I’m, I’m happy when the shareholder does well and I think we have several innings to play out on this over time and we’ll see you know there’s going to be a lot of relocation of shareholders given what we’re doing around capital structure and it will take a little bit of time to play out but I’m absolutely confident we’re gonna see good things for, for both equities when this is all said and done and yeah I’m a little sad. There’s, there’s some individuals I feel pretty close to and in the company that David’s going to inherit that have done remarkably good work and have been loyal and worked incredibly hard to do what this business has done to put it in this position and to not have an opportunity to work with them day in and day out is a little melancholy for me to be honest with you.
FABER: I understand that, and finally to the soon to be most powerful man in media, you know, your powers aren’t getting that stock price up right now, David.
ZASLAV: Hey, well, my goal is to work with all the assets that John is contributing into this new company. And, let’s see, let’s see where we are in a few years. And the goal is to be the media company that reaches everyone, everywhere in the world. We got a great running start here and it’s a super exciting moment for us at Discovery for our whole board, and we’ll see where the stock price is in the next couple of years. If we do a good job, we’re going to create a huge amount of shareholder value.
FABER: Do we have a name? Do you have a name yet?
ZASLAV: We’ll be announcing the name in the next few days in the next week.
FABER: All right, gentlemen, very much appreciate you taking time this morning, thank you. John Stankey, thank you. David Zaslav.
