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AT&T to Merge WarnerMedia With Discovery in $43 Billion Deal

David Zaslav will lead combined media behemoth

AT&T announced Monday that it was spinning off WarnerMedia into an independent company that will merge with Discovery Inc. and be run by Discovery CEO David Zaslav.

Under the terms of the all-stock agreement, AT&T will receive $43 billion (a figure subject to adjustment) in a combination of cash, debt securities and WarnerMedia’s retention of certain debt, and AT&T’s shareholders will receive stock representing 71% of the new company. Discovery shareholders will own 29% of the new company, which Zaslav said would announced its new name in coming days. The boards of directors at both companies have approved the merger.

The estimated combined value of the new company, which is expected to have its name revealed later this week, is $130 billion, TheWrap has learned.

The deal, which is expected to close in mid-2022 subject to regulatory approval and a vote by Discovery shareholders will create an entertainment juggernaut that seeks to rival Netflix and Disney, and puts the likes of Warner Bros., CNN, Turner and Discovery’s stable of nonfiction networks under one roof — as well as two competing streaming services, Discovery+ and HBO Max. It also combines WarnerMedia’s U.S. sports rights like the NBA, MLB and March Madness with Discovery international sports giant Eurosport.

The combined company’s anticipated 2023 revenue is approximately $52 billion, with $15 billion expected from direct-to-consumer revenue. The merger should bring about “at least” $3 billion annually in cost savings via synergies, the companies said. That typically means layoffs are coming.

The new company will initially have $55 billion in debt, Zaslav said in a press conference with AT&T CEO John Stankey following the announcement. He said that the company would also have $8 billionin free cash flow that would allow the company to quickly pay down that debt while also leaving room for expansion and strategic investment.

One question mark that remains is the fate of Jason Kilar, the former head of Hulu who last year became the CEO of WarnerMedia. While Zaslav offered praise for Kilar, Stankey noted, “David has a lot of decisions to make” about personnel at the new company.

The new company’s board of directors will consist of 13 members. Seven will initially be appointed by AT&T, including the chairperson of the board. Discovery will initially appoint 6 members, including CEO David Zaslav.

The surprising deal marks a stunning reversal for AT&T, who is walking away from the content business just three years after it completed its $85 billion acquisition of what was then Time Warner.

“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 in a statement on Monday. “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.”

“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 added. “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.”

The deal comes as HBO Max continues its rollout since its launch a year ago, offering all of Warner Bros.’ 2021 films the same day they are released in theaters with plans to introduce a cheaper ad-supported tier later this year. The service will also be launched worldwide in June. Combined with HBO, the service has accumulated over 44 million subscribers, adding 2.7 million this past quarter.

Discovery+, meanwhile, was launched in January, accumulating 13 million subscribers with its offering of unscripted original programming as well as streaming on-demand of hit shows on the companies’ networks like “Fixer Upper” and “Deadliest Catch.”

The coupling of WarnerMedia and Discovery immediately becomes one of largest players in Hollywood — topped only by Disney — and joins together two of the biggest streaming newcomers. Together, WarnerMedia and Discovery garnered more than $41 billion in ad sales in 2020, with an operating profit above $10 billion.

The fate of the two streaming services remains a question mark, and Zaslav signaled that the company might pursue more than one approach. The company could bundle the two in the same way Disney offers a discount for those who buy all three of its streaming services: Disney+, ESPN+ and Hulu. A merger or bundling partnership of the two streamers would be the latest phase in a growing trend of media consolidation following Disney’s purchase of 20th Century Fox in 2019 and Discovery’s own purchase of Scripps Networks the year prior for $14.6 billion.

WarnerMedia has undergone multiple restructurings in its three years under AT&T, and now figures to see its organization flowchart change yet again. For Zaslav, the deal puts him atop one of the biggest players in Hollywood and cements an already-impressive legacy for one of the industry’s biggest titans, as well as that of Liberty Global CEO John Malone, one of Discovery’s biggest shareholders.

Since taking over last summer as CEO of AT&T, John Stankey has unwound some of his predecessor Randall Stephenson’s biggest deals. In February, AT&T spun off its video assets, including struggling satellite provider DirecTV, in a $7.8 billion deal with TPG Capital. AT&T bought DirecTV in 2015 for $49 billion, just before the pay-TV bundle was about to start an irreversible decline. AT&T also took on hefty amounts of debt to complete its purchase of Time Warner.

The announcement comes ahead of the May Upfront Week, when the broadcast networks and some of the top cable channels present their new programming and fall schedules to advertisers. Discovery is set to present on Tuesday, with WarnerMedia going on Wednesday.