AT&T and Discovery Combine Their Media Assets

AT&T Retreats From Entertainment

AT&T (T) and Discovery (DISCB) are combining their media assets in a $43 billion deal to create a new stand-alone public company. AT&T has recently been taking a number of steps to exit the entertainment industry. Earlier this year AT&T sold a 30% stake in DirectTV to the private equity firm TPG for $1.8 billion.

The new company, which AT&T and Discovery have not yet named, will be headed by David Zaslav, the current CEO of Discovery. It will hold around $55 billion in debt. AT&T shareholders will own 71% of the new company and Discovery shareholders will have a 29% ownership stake. AT&T will receive a combination of cash, debt, and stock when the deal closes.

More Competition Coming

Talks to combine AT&T’s Warner Media with Discovery have been ongoing for several months. The new company will be designed to take on streaming services including Netflix (NFLX), Amazon (AMZN), Disney+ (DIS), and Apple (AAPL). Combined, AT&T and Discovery spend $20 billion on content, which is higher than what Netflix spends.

It is not clear what the new company’s plans are for HBO Max and Discovery+, their standalone streaming services. They could remain separate or be combined to create a larger library of content.

A Smaller AT&T

AT&T plans to reduce its dividend to reflect its smaller size. The total annual payout will be between $8 billion and $8.6 billion, which is about half of what investors received in prior years. The deal will also reduce AT&T’s debt, which was $169 billion as of March.

The sale of the Warner Media assets unwinds AT&T’s $81 billion acquisition of Time Warner which occurred in 2018. Back then the US Justice Department was worried the combined company would harm competition in the pay-TV market. Even three years ago, analysts did not predict what a significant impact the internet would have on pay-TV, and that streaming would hurt pay-TV more than a combined AT&T and Time Warner. The media industry will be keeping a close watch on the deal as it unfolds.

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