AT&T to merge media assets with Discovery in $43 bn deal

Under the proposed deal, one of Hollywood's most powerful studios, which is home to the Harry Potter and Batman franchises, will be merged with Discovery, with its home, cooking and nature and science shows.

As per the terms of the deal, AT&T would receive $43 billion in a combination of cash, debt securities, while  WarnerMedia will assume some of its debt as well. AT&T's shareholders would receive stock representing 71 per cent of the new company, while Discovery shareholders would own 29 per cent of the new company.

The deal will also see the unwinding of AT&T's $108.7 billion acquisition of US media conglomerate Time Warner in 2018.

Discovery president and chief executive David Zaslav will lead the new company.

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 utilize 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.

Following completion of the transaction and a review of capital allocation to return strategy, AT&T expects dividend payout ratio to be in the low 40s%.

After close and on a pro-forma basis, AT&T expects revenue growth of its remaining assets to be low single digits CAGR. Annual adjusted EBITDA and adjusted EPS growth is expected to be i mid-single digits CAGR.

There will, however, be significantly increased financial flexibility to drive returns to shareholders, including an expected increase in capital investment for incremental investments in 5G and fiber 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 the end of 2023. And the company plans to expand its fiber footprint to cover 30 million customer locations by the end of 2025.

Significant debt reduction: Expect net debt to adjusted EBITDA in the 2.6x range after transaction closes and less than 2.5x by the end of 2023.

After close and subject to AT&T board approval, AT&T expects an annual dividend payout ratio of 40 to 43 per cent on anticipated free cash flow of over $20 billion.

LionTree LLC and Goldman Sachs & Co LLC served as financial advisors and Sullivan & Cromwell LLP served as legal advisor to AT&T.

Allen & Company LLC and JP Morgan Securities LLC served as financial advisors and Debevoise & Plimpton LLP served as legal advisor to Discovery. Peralla Weinberg Partners and Wachtell Lipton, Rosen & Katz served as advisors to the Independent Directors of Discovery.

RBC Capital Markets served as financial advisors and Paul, Weiss, Rifkind, Wharton & Garrison LLP served as legal advisors to Advance, as per a company release.