AT&T Divests WarnerMedia in Landmark Deal

A significant shift is occurring within the U.S. telecommunications landscape as AT&T moves to reduce its involvement in media services and content production. The company announced today that it will be merging its WarnerMedia division with Discovery Inc.

Deal Structure and Ownership

The transaction is structured as a “Reverse Morris Trust,” resulting in AT&T receiving $43 billion comprised of cash, debt securities, and the retention of specific WarnerMedia debt. AT&T shareholders will control approximately 71% of the newly formed company, while Discovery shareholders will hold a 21% stake, as detailed in the official announcement.

Leadership Transition

David Zaslav, currently President and CEO of Discovery, will assume leadership of the combined entity. The future role of Jason Kilar, the present CEO of WarnerMedia, remains undefined, as he was not mentioned in the official press release. AT&T CEO John Stankey confirmed Kilar’s current position during a press conference.

Following Industry Trends

This agreement follows recent speculation over the weekend and mirrors Verizon Communications’ earlier decision to divest its non-telecom assets, Verizon Media, to Apollo Management for $5 billion. [TechCrunch operates as a part of Verizon Media.] Zaslav revealed during a joint press conference with Stankey that the agreement was finalized in private discussions held at his Greenwich Village residence.

Timeline and Branding

Executives from both companies anticipate the deal’s completion by mid-2022. A new company name will be unveiled at a later date, they stated.

The Rise of Streaming and a Content Powerhouse

As the media industry increasingly centers around streaming platforms – with consumers accessing content through diverse devices like smartphones and tablets – this merger is poised to create a substantial content provider.

Extensive Content Library

The combined entity will boast a library of approximately 200,000 hours of programming, encompassing over 100 well-known and highly regarded brands. These include HBO, Warner Bros., Discovery, DC Comics, CNN, Cartoon Network, HGTV, Food Network, the Turner Networks (TNT, TBS), Eurosport, Magnolia, TLC, and Animal Planet. The companies have confirmed their intention to integrate news content within the primarily entertainment-focused portfolio.

Financial Projections

The new company is projected to generate roughly $52 billion in annual revenue, with adjusted EBITDA of approximately $14 billion. A free cash flow conversion rate of around 60% is anticipated, alongside expected cost synergies of “at least $3 billion.” (Achieving such substantial cost reductions will present a significant challenge.)

AT&T’s Strategic Shift

This move represents a partial reversal for AT&T, which previously invested heavily in building its Warner empire and navigating regulatory hurdles. This expansion was intended to allow the company to offer not only network services – voice, broadband, and mobile – but also the content itself.

Empowering Content Creators

While AT&T shareholders will maintain a 71% ownership stake, the deal signifies the company’s belief that the content creation businesses will thrive as an independent entity. This structure is expected to grant these content companies greater autonomy in negotiating distribution agreements with various network providers, free from potential conflicts of interest. Furthermore, it will allow the media companies to explore optimal distribution channels, even those that may directly compete with AT&T.

From “Triple Play” to “Pure Play”

Historically, the industry focused on “triple play” (TV, broadband, and voice) and “quad play” (adding mobile) as the ideal service bundles to attract consumers. However, realizing this vision has proven complex, leading companies to emphasize the benefits of a “pure play” approach.

Statements from Leadership

“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,” stated AT&T CEO John Stankey. “It will support the fantastic growth and international launch of HBO Max with Discovery’s global footprint and create efficiencies which can be reinvested 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.”

Discovery’s Perspective

Zaslav and Discovery, once competitors to the Warner empire, now view the merger favorably:

“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 explained. “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.”