AT&T, Discovery to create global DTC business through Reverse Morris Trust
AT&T (T) and Discovery (DISCA) announced a definitive agreement to combine WarnerMedia’s premium entertainment, sports and news assets with Discovery’s nonfiction and international entertainment and sports businesses to create a standalone global entertainment company.
Under the terms of the agreement, which is structured as an all-stock, Reverse Morris Trust transaction, AT&T would receive $43B in a combination of cash, debt securities, and WarnerMedia’s retention of certain debt, and AT&T’s shareholders would receive stock representing 71% of the new company; Discovery shareholders would own 29% of the new company.
The boards of both AT&T and Discovery have approved the transaction.
Bringing together the leadership teams, content creators, and series and film libraries.
The new company is projected for 2023 revenue of approximately $52B, adjusted EBITDA of approximately $14B, and free cash flow conversion rate of approximately 60%.
The transaction is expected to create at least $3B in expected cost synergies annually for the new company.
The new company will compete globally in the direct-to-consumer business bringing content to DTC subscribers across its portfolio, including HBO Max and the recently launched discovery+.
The transaction will combine WarnerMedia’s content library of IP with Discovery’s global footprint, local-language content and regional expertise across more than 200 countries and territories.
The companies announced that Discovery president and CEO David Zaslav will lead the proposed new company with a management team and 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 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.
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 $43B 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 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 John Malone and Advance to vote in favor of the transaction.
Elliott Management
Elliott Investment Management released a statement on behalf of Managing Partner Jesse Cohn and Portfolio Manager Marc Steinberg regarding AT&T’s plan to merge media assets with Discovery:
“It has been a transformational year at AT&T year since John Stankey took over as CEO, and today’s announcement represents another impressive step in the Company’s recent evolution.
AT&T has now executed on its promise to streamline operations and re-focus on its core businesses, all while improving operational execution, enhancing its financial position and advancing its corporate governance. As investors, Elliott supports AT&T in its efforts to best position the company for future success.”
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