AT&T has announced a deal to combine WarnerMedia’s entertainment, sports and news assets with Discovery’s non-fiction and international entertainment and sports businesses. The new company will be spun off as a separate entity, with AT&T shareholders receiving 71 percent of the shares and Discovery shareholders 29 percent. AT&T will receive USD 43 billion worth of cash, debt securities and WarnerMedia’s retention of certain debt, freeing up cash to invest in its 5G and fixed broadband services.
The boards of directors of both companies have approved the transaction. It still needs approval from Discovery shareholders and regulators before it can be completed, with the process expected to take around one year.
Annual revenues of USD 52 billion in 2023
The merger would create a company with projected 2023 revenues of USD 52 billion, adjusted EBITDA of USD 14 billion and a free cash flow conversion rate of 60 percent. The companies expect to create at least USD 3 billion worth of cost synergies per year, with the money saved plowed back into content and digital innovation, and to scale its global direct-to-consumer (DTC) business. AT&T and Discovery said in a statement that they aim to bring 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.”
Looking ahead, the new company will be able to invest in more original content for HBO Max, Discovery+ and other streaming services, and to improve programing options across its global linear pay-TV and broadcast channels. The new company will own one of the largest content libraries in the world, with 200,000 hours of programming and over 100 brands, including including HBO, Warner Bros., Discovery, DC Comics, CNN, Cartoon Network, HGTV, Food Network, the Turner Networks, TNT, TBS, Eurosport, Magnolia, TLC, Animal Planet and ID, among others.
Discovery CEO David Zaslav will lead the merged entity and there will be 13 members on the board, including seven initially appointed by AT&T (including the chairperson) and six by Discovery, including Zaslav.
The new company expects to maintain its investment grade rating and use its cash flow to rapidly de-lever to 3.0x within 24 months, and to target a new, longer term gross leverage target of 2.5x-3.0x. WarnerMedia will use financing from JPMorgan Chase Bank and affiliates of Goldman Sachs to help fund the deal, expected to close in mid-2022.
AT&T to invest in 5G and fibre, plus dividends and share buybacks
For AT&T and its shareholders, pulling media operations out into a separate entity will enable the carrier to put a sharper focus on mobile and fixed broadband, seen as growth areas. The carrier said the capital structure improvement after completion will position AT&T as one of the best capitalised 5G and fibre broadband companies in the US.
After completion and on a pro-forma basis, AT&T expects its remaining assets to produce, from 2022 to 2024, annual revenue growth at a low single-digit CAGR and annual adjusted EBITDA and adjusted EPS growth at mid-single digits CAGR. The company will have much more capex for its 5G and fibre plans, rising to USD 24 billion at close. The carrier expects its 5G C-band network to cover 200 million people in the US by year-end 2023 and its fibre footprint to reach 30 million customer locations by year-end 2025.
The company said it will propose an annual dividend payout ratio of of 40-43 percent, on anticipated free cash flow of over USD 20 billion. There will also be an option to buy back shares once net debt to adjusted EBITDA is less than 2.5x.
