AT&T to combine its media assets with Discovery to create new company

Discovery's chief executive David Zaslav will lead the proposed new company

AT&T said it will use the $43 billion proceeds from the tax-free spin-off of its media assets to pay down its debt. EPA

AT&T, owner of HBO and Warner Bros studios, and Discovery, home to lifestyle TV networks such as HGTV and TLC, said on Monday they will combine their content assets to create a standalone global entertainment and media business.

Discovery chief executive David Zaslav will lead the proposed new company, which will comprise one of Hollywood's most powerful studios, including the Harry Potter and Batman franchises, news network CNN, sports programming and Discovery's unscripted home, cooking and nature and science shows.

Shares in Discovery climbed about 16 per cent to $41.3 in premarket trade but fell 2 per cent afterward as investors digested that it would take time for Discovery to scale up in streaming, said Rich Greenfield, partner at LightShed Partners.

This company is going to take a year to be in position to take control of the assets

"This company is going to take a year to be in position to take control of the assets," he said. "The new company will be better after the deal, but it will take time."

AT&T stock rose about 3 per cent to $33.23 after the announcement of the new company, which will be 71 per cent owned by AT&T shareholders and 29 per cent by Discovery investors.

AT&T said it will use the $43 billion proceeds from the tax-free spin-off of its media assets to pay down its more than $160 billion of debt.

The telecoms giant also said it planned to cut its dividend payout ratio, which is the percentage of earnings paid to shareholders in dividends, to the low 40 per cent range, down from around 60 per cent in the previous quarter.

The enterprise value of the new combined company will be more than $120bn, carrying $58bn in debt, including $43bn from WarnerMedia and $15bn from Discovery.

The name of the new company will be disclosed by next week, while other details, including the future role of WarnerMedia chief executive Jason Kilar and how the combined properties and services will be arranged, have yet to be worked out, executives said on a call with reporters after the deal was announced.

Monday's move marks the unwinding of AT&T's ambitious plan to forge a telecoms and media powerhouse through a flurry of deals including the 2018 $108.7bn acquisition of US media conglomerate Time Warner and the 2015 purchase of satellite TV service DirecTV for $68bn.

The deal today underscores the movement of TV viewership to streaming, where scale is required to take on the likes of Netflix and Walt Disney.

"The opportunities in direct to consumer streaming are rapidly evolving, and to keep pace and maintain a leadership position, several things are required - global scale, access to capital, a broad array of high quality content and industry best talent," AT&T chief executive John Stankey told a news briefing.

Combined the company will spend about $20bn on content, more than the $17bn Netflix will spend this year. Mr Zaslav said he expected the company to increase its programming investment in the future.

"While further details have yet to emerge, the proposed horizontal combination would create a global content behemoth uniting WarnerMedia's premier news and entertainment assets with Discovery's industry-leading cache of non-scripted programming networks," Keith Snyder at CFRA Research said.

The deal is not surprising, Mr Snyder added, after pressure on traditional pay-TV ramped up during the coronavirus pandemic as consumers binge-watched streaming shows while stuck at home.

With Time Warner, former AT&T chief executive Randall Stephenson sought to create a media and telecoms giant, combining content and distribution.

Yet it proved a costly strategy as AT&T simultaneously sought to expand next generation wireless services, most recently spending $23bn to buy more spectrum.

AT&T is not the first telecoms company to shed its media assets. On May 3, Verizon Communications announced plans to get rid of its media businesses that include iconic brands Yahoo and AOL for $5bn, ending an expensive and unsuccessful run in the media and advertising world.

AT&T and Discovery's new company is projected to have 2023 revenue of about $52bn and adjusted EBITDA of about $14bn.

The deal is anticipated to close in mid-2022, pending approval by Discovery shareholders and regulatory approvals.

The new company is expected to see $3bn in cost synergies and has no plans to sell any assets.