What AT&T’s WarnerMedia and Discovery merger means for the media landscape

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On Monday, AT&T confirmed a megamerger media deal with Discovery, which would combine WarnerMedia – including brands such as CNN, HBO, Warner Bros. and DC Comics – with Discovery, Inc. in a $43 billion transaction.

The announcement also sparked a discussion among analysts and reporters on the future of media, as the number of multifront businesses and streaming services continues to increase.

The companies announced that Discovery President and CEO David Zaslav will lead the proposed new company with a “best-in-class management” team and operational leadership. 

“During my many conversations with John, we always come back to the same simple and powerful strategic principle these assets are better and more valuable together,” Zaslav said in a statement. “It is super exciting to combine such historic brands, world class journalism and iconic franchises under one roof and unlock so much value and opportunity. With a library of cherished IP, dynamite management teams and global expertise in every market in the world, we believe everyone wins…consumers with more diverse choices, talent and storytellers with more resources and compelling pathways to larger audiences, and shareholders with a globally scaled growth company committed to a strong balance sheet that is better positioned to compete with the world’s largest streamers. We will build a new chapter together with the creative and talented WarnerMedia team and these incredible assets built on a nearly 100-year legacy of the most wonderful storytelling in the world. That will be our singular mission: to focus on telling the most amazing stories and have a ton of fun doing it.”

Discovery’s current multiple classes of shares will be consolidated to a single class with one vote per share.

The new company’s Board of Directors will consist of 13 members, seven initially appointed by AT&T, including the chairperson of the board; Discovery will initially appoint six members, including CEO David Zaslav.

“This agreement unites two entertainment leaders with complementary content strengths and positions the new company to be one of the leading global direct-to-consumer streaming platforms,” AT&T CEO John Stankey said. “It will support the fantastic growth and international launch of HBO Max with Discovery’s global footprint and create efficiencies which can be re-invested in producing more great content to give consumers what they want. For AT&T shareholders, this is an opportunity to unlock value and be one of the best capitalized broadband companies, focused on investing in 5G and fiber to meet substantial, long-term demand for connectivity. AT&T shareholders will retain their stake in our leading communications company that comes with an attractive dividend. Plus, they will get a stake in the new company, a global media leader that can build one of the top streaming platforms in the world.”

AT&T Huron Road Building as seen from the Terminal Tower observation deck in Ohio.

Under the terms of the agreement, which is structured as an all-stock, Reverse Morris Trust transaction, AT&T would receive $43 billion (subject to adjustment) in a combination of cash, debt securities, and WarnerMedia’s retention of certain debt, and AT&T’s shareholders would receive stock representing 71 percent of the new company; Discovery shareholders would own 29 percent of the new company. The Boards of Directors of both AT&T and Discovery have approved the transaction.

The companies expect the transaction will create substantial value for AT&T and Discovery shareholders by bringing together the strongest leadership teams, content creators, and high-quality series and film libraries in the media business.

According to AT&T, this new deal will be accelerating both companies’ plans for leading direct-to-consumer (DTC) streaming services for global consumers, uniting complementary and diverse content strengths with broad appeal — WarnerMedia’s studios and portfolio of scripted entertainment, animation, news and sports with Discovery’s international entertainment and sports.

This merger will be forming a new company that will have significant scale and investment resources with projected 2023 Revenue of approximately $52 billion, adjusted EBITDA of approximately $14 billion, and an industry leading Free Cash Flow conversion rate of approximately 60 percent.

According to AT&T, at least $3 billion in expected cost synergies annually for the new company to increase its investment in content and digital innovation, and to scale its global DTC business.

AT&T stated in a press statement, this “new company” will compete globally in the fast-growing direct-to-consumer business – bringing compelling content to DTC subscribers across its portfolio, including HBO Max and the recently launched discovery+. 

The transaction will combine WarnerMedia’s storied content library with Discovery’s global footprint, trove of local-language content and deep regional expertise across more than 200 countries and territories. 

According to AT&T, this will enable invest in more original content for its streaming services, enhance the programming options across its global linear pay TV and broadcast channels and offer more innovative video experiences and consumer choices.

The combination will be executed through a Reverse Morris Trust, under which WarnerMedia will be spun or split off to AT&T’s shareholders via dividend or through an exchange offer or a combination of both and simultaneously combined with Discovery. The transaction is expected to be tax-free to AT&T and AT&T’s shareholders.

In connection with the spin-off or split-off of WarnerMedia, AT&T will receive $43 billion (subject to adjustment) in a combination of cash, debt securities and WarnerMedia’s retention of certain debt. 

The new company expects to maintain investment grade rating and utilize the significant cash flow of the combined company to rapidly de-lever to approximately 3.0x within 24 months, and to target a new, longer term gross leverage target of 2.5x-3.0x. WarnerMedia has secured fully committed financing from JPMorgan Chase Bank, N.A. and affiliates of Goldman Sachs & Co. LLC for the purposes of funding the distribution.

The transaction is anticipated to close in mid-2022, subject to approval by Discovery shareholders and customary closing conditions, including receipt of regulatory approvals. No vote is required by AT&T shareholders. Agreements are in place with Dr. John Malone and Advance to vote in favor of the transaction.

Zack Benz

Zack Benz has been a fan of the Daily Planet since he was eight years old. The Daily Planet has always been a beacon of hope for him and it’s his life’s mission to make it shine in a similar light to so many around the world. Zack graduated with a degree in journalism and art from the University of Minnesota Duluth in 2019.

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