WarnerMedia, Discovery spin-off confirmed
May 17, 2021
AT&T and Discovery have confirmed an agreement to combine WarnerMedia’s entertainment, sports and news assets with Discovery’s nonfiction and international entertainment and sports businesses to create a standalone global streaming entertainment company.
Under the deal AT&T will receive $43 billion [€35.45bn] (subject to adjustment) in a combination of cash, debt securities, and will own 71 per cent of the new company with Discovery 29 per cent . The Boards of Directors of both AT&T and Discovery have approved the transaction. Both had agreed substantial ‘break-off’ fees for the negotiations – $1.8bn for Discovery and $720m for AT&T – to ensure no one was just tyre kicking.
The new company will have a forecast enterprise value of $132bn (inc $56bn of debt) and will rank only behind Disney as a media company; the combined businesses should have about $41bn turnover, Disney has $65bn.
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.
- 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 robust studios and portfolio of iconic scripted entertainment, animation, news and sports with Discovery’s global leadership in unscripted and international entertainment and sports.
- 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 per cent.
- Creating 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.
- For AT&T and its shareholders, this transaction provides an opportunity to unlock value in its media assets and to better position the media business to take advantage of the attractive DTC trends in the industry. Additionally, the transaction allows the company to better capitalise on the longer-term demand for connectivity:
- AT&T shareholders participate in a leading media company with a broad global portfolio of brands, tremendous DTC potential and strengthened combined assets.
- Creates substantial value opportunity for AT&T shareholders through stepped-up investment in growth areas – mobile and fixed broadband.
- Capital structure improvement after closing will position AT&T as one of the best capitalised 5G and fibre broadband companies in the United States.
- Results in two independent companies – one broadband connectivity and the other media – to sharpen the investment focus and attract the best investor base for each company.
A Stronger Competitor in Global Streaming
The 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 of popular and valuable IP with Discovery’s global footprint, trove of local-language content and deep regional expertise across more than 200 countries and territories. The new company will be able to 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.
Uniting Dynamic, Enduring and Historic Brands and Franchises
The ‘pure play’ content company will own one of the deepest libraries in the world with nearly 200,000 hours of iconic programming and will bring together over 100 of the most cherished, popular and trusted brands in the world under one global portfolio, including: HBO, Warner Bros., Discovery, DC Comics, CNN, Cartoon Network, HGTV, Food Network, the Turner Networks, TNT, TBS, Eurosport, Magnolia, TLC, Animal Planet, ID and many more.
The new company will be able to increase investment and capabilities in original content and programming; create more opportunity for under-represented storytellers and independent creators; serve customers with innovative video experiences and points of engagement; and propel more investment in high-quality, family-friendly nonfiction content.
Leadership, Governance and Structure
The companies announced that Discovery President and CEO David Zaslav will lead the proposed new company with a best-in-class management team and top operational and creative leadership from both companies.
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,” stated John Stankey, CEO of AT&T. “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 capitalised broadband companies, focused on investing in 5G and fibre 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.”
“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,” added Zaslav. “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.”
Transaction Highlights
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 utilise 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 favour of the transaction.
AT&T Preliminary Financial Profile Following Completion of the Transaction; Focused Total Return Strategy for Capital Allocation; After Close, Dividend Payout Ratio Expected to be Low 40s per cent.
After close and on a pro-forma basis, AT&T expects its remaining assets to produce the following financial trajectory from 2022 to 2024:
- Annual revenue growth: low single digits CAGR
- Annual adjusted EBITDA and adjusted EPS growth: mid-single digits CAGR
- Significantly increased financial flexibility to drive returns to shareholders, including:
- Expected increased capital investment for incremental investments in 5G and fibre broadband. The company expects annual capital expenditures of around $24 billion once the transaction closes. AT&T expects its 5G C-band network will cover 200 million people in the US by year-end 2023. And the company plans to expand its fibre footprint to cover 30 million customer locations by year-end 2025.
- Significant debt reduction: Expect Net Debt to Adjusted EBITDA in the 2.6x range after transaction closes and less than 2.5x by year end 2023.
- Attractive dividend – resized to account for the distribution of WarnerMedia to AT&T shareholders. After close and subject to AT&T Board approval, AT&T expects an annual dividend payout ratio of 40 per cent to 43 per cent on anticipated free cash flow of $20 billion plus.
- The optionality to repurchase shares once Net Debt to Adjusted EBITDA is less than 2.5x
According to Kester Mann, director, consumer and connectivity, CCS Insight, the deal is a tacit recognition from AT&T that its lavish acquisition strategy to assemble an empire of media holdings has spectacularly failed to achieve its objectives. “AT&T is determined to take on giant streaming providers such as Netflix and Disney, but clearly feels it is unable to take this leap alone as the market for consuming content continues to evolve,” he suggests.
“AT&T has been facing a dilemma familiar to many other large telecom operators: does it sharpen its focus on fixed-line and mobile networks to offer best-in-class connectivity amid questionable long-term return, or place bold risks on fuelling new revenue from adjacent areas such as content? The company’s decision to work with Discovery to better maximise its media assets is a strong clue to where its priorities lie,” he observes.