By Drew FitzGerald, Cara Lombardo and Joe Flint
AT&T Inc. and Discovery Inc. reached a deal to combine their
media assets into a new, publicly traded company, unwinding the
telecom company's big bet on entertainment after less than three
years.
The new business, which isn't yet named, will be led by current
Discovery Chief Executive David Zaslav. The companies said Jason
Kilar will retain his title as CEO of AT&T's WarnerMedia
division but declined to say whether he would remain with the newly
combined company after it secures regulatory approval.
Shares of both companies leapt early Monday. Discovery's market
value traded above $17 billion. AT&T, which draws most of its
revenue from the telecommunications business, had a roughly $240
billion market value. The new media business will hold a little
more than $55 billion of debt, Mr. Zaslav said.
AT&T Chief Executive John Stankey said in an online news
conference Monday that he had been "contemplating the structure of
our business for some time" and eventually decided that the pairing
with Mr. Zaslav's company would benefit both parties.
Mr. Zaslav, a media mogul and longtime friend of WarnerMedia
executive and CNN boss Jeff Zucker, said the transaction came
together over several months of talks that included chats in the
Discovery chief's Greenwich Village brownstone.
Mr. Zaslav said the combined entities spend $20 billion on
content, a level that tops Netflix Inc.'s recent programming
budget. WarnerMedia owns cable channels such as HBO, CNN, TNT and
TBS as well as the Warner Bros. television and film studio.
Discovery has a portfolio that includes its namesake network and
HGTV.
Both companies also offer streaming video portals that compete
with larger on-demand services like Netflix and Walt Disney Co.'s
Disney+. The two CEOs declined to detail their long-term plans for
HBO Max and Discovery+, which could remain separate or be combined
into an even larger online video library.
"You gotta have content people love so much they would run home
and pay for it before they pay for dinner or a roof over their
head," Mr. Zaslav said on a call with investors.
Under the deal, AT&T shareholders will hold a 71% stake in
the new entity, while Discovery shareholders own a 29% stake. In
exchange, AT&T said it will receive $43 billion of cash, debt
securities and WarnerMedia's retention of certain debt.
AT&T also signaled it will cut its dividend to reflect its
smaller size once the media business is carved out into a separate
company. The Dallas company said it expects an annual dividend
payout ratio of 40% to 43% from more than $20 billion of expected
free cash flow, implying a total payout of between $8 billion and
$8.6 billion. That payment to shareholders would amount to a little
over half what investors have collected from the media and telecom
conglomerate in past years.
AT&T reported $169 billion of net debt at the end of March,
a level that has troubled some investors worried about the
conglomerate's financial flexibility.
The transaction unwinds a hard-fought acquisition that AT&T
closed for about $81 billion in 2018 after beating a court
challenge by U.S. Justice Department officials, who argued that the
combination would hurt competition in the pay-TV market.
The telecom company at the time controlled the country's largest
pay-TV distribution network, mostly through DirecTV, before it
added one of the biggest cable channel owners.
The deal unveiled Monday will complete AT&T's retreat from
the media business. The company earlier this year reached an
agreement with private-equity firm TPG to shed a 30% stake in its
DirecTV business for $1.8 billion. AT&T had acquired DirecTV in
2015 for $49 billion, at the height of a pay-TV market that has
since collapsed due to cord-cutting subscribers.
AT&T, meanwhile, faces mounting demands on the wireless and
broadband networks that still generate most of its profits. The
company spent more than $23 billion on a recent Federal
Communications Commission auction of wireless licenses and will
need to spend tens of billions of dollars more in the coming years
to match investments by rivals Verizon Communications Inc. and
T-Mobile US Inc. in improving their networks.
AT&T on Monday said it would boost its planned capital
expenditures to about $24 billion a year once the transaction
closes. Executives earlier this year projected $18 billion of
capital spending in 2021.
The companies said they expect to close the transaction in
mid-2022.
AT&T shares, down about 25% since mid-2016, rose more than
3% in premarket trading Monday after the deal was announced. Shares
of Discovery jumped more than 12%.
For WarnerMedia, access to Discovery's popular unscripted and
reality content will give it programming that it desperately needs
to compete with Netflix, Disney+ and other streaming platforms.
Unscripted programming has become a very popular asset on streaming
sites, particularly at Netflix. While HBO Max has some unscripted
programing, Discovery has a huge library of content including "90
Day Fiancé" and "Diners, Drive-Ins and Dives."
The combined companies also will have a huge footprint in
sports, particularly overseas. Discovery has a long-term
international rights agreement for the Olympics and has been
aggressive in acquiring rights to other major European sports and
events.
WarnerMedia has rights to the National Basketball Association,
the "March Madness" college basketball tournament and some playoff
baseball. It recently signed a seven-year deal to carry National
Hockey League games.
"We're pretty flush with sports rights," Mr. Zaslav said on the
call with investors.
He said that strong relationships with the creative community
will be his top priority when he assumes leadership of the new
company.
Under Mr. Kilar, talent relations between WarnerMedia and the
creative community have been strained due in part to decisions
regarding the distribution of theatrical movies in the past
year.
--Ben Mullin and Dana Cimilluca contributed to this article.
Write to Drew FitzGerald at andrew.fitzgerald@wsj.com, Cara
Lombardo at cara.lombardo@wsj.com and Joe Flint at
joe.flint@wsj.com
(END) Dow Jones Newswires
May 17, 2021 10:29 ET (14:29 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
Discovery (NASDAQ:DISCB)
Historical Stock Chart
From Aug 2024 to Sep 2024
Discovery (NASDAQ:DISCB)
Historical Stock Chart
From Sep 2023 to Sep 2024