AT&T Communications, LLC is spinning off its media holdings - including HBO, CNN, TNT, TBS and the Warner Bros. studio - into a new venture with Discovery, Inc.
Shares in Discovery were expected to open down 0.6% Tuesday on the Nasdaq at $32.05 each. They closed Monday down 5.1% at $32.05 as details of the merger filtered through. They had risen as high as $41.3 in Monday premarket trade. The fall came as market participants realized it would take time for Discovery to scale up in streaming.
For AT&T, its shares will get a hammering at the open Tuesday on the New York Stock Exchange. Overnight trading suggests they will hear the bell at $30.04 each - down 4.3% lower than their Monday close. That was a bit of a bloodbath, too. Monday trading saw AT&T paper sold fast. The issue closed the day at $31.37 each - down 2.7%.
"This company is going to take a year to be in position to take control of the assets," he said. "The new company will be better after the deal, but it will take time," Rich Greenfield at LightShed Partners told Reuters.
The two media companies plan to form a new standalone, international entertainment company they say will boast the "most differentiated content portfolio in the world." AT&T's shareholders are expected to receive stock representing 71% of the new company while Discovery shareholders would own 29%.
Discovery chief executive David Zaslav will lead the proposed new company, which will comprise one of Hollywood's most powerful studios, including the Harry Potter and Batman franchises, news network CNN, sports programming and Discovery's unscripted home, cooking and nature and science shows, Reuters reported Tuesday.
AT&T said it will use the $43 billion proceeds from the tax-free spinoff of its media assets to pay down its more than $160 billion of debt.
The telecommunication company will cut its dividend payout ratio to the low 40% range from around 60% in the previous quarter.
The enterprise value of the new combined company will be more than $120 billion, carrying $58 billion in debt, including $43 billion from WarnerMedia LLC and $15 billion from Discovery.
The deal underscores the movement of TV viewership to streaming, where scale is required to take on the likes of Netflix, Inc. and The Walt Disney Co.
AT&T and Discovery's new combined venture is projected to have 2023 revenue of about $52 billion and adjusted earnings before interest, taxes, depreciation and amortization of about $14 billion. The deal is anticipated to close in mid-2022, pending approval by Discovery shareholders and regulatory approvals.
In February, AT&T agreed to sell 30% of satellite broadcaster DirecTV and give up operational control of its pay-TV unit. This decision was arrived at because customers gave up expensive TV channel bundles for less expensive streaming alternatives. According to The Wall Street Journal, these two deals have wiped out tens of billions of dollars of equity value.
AT&T has been seeking to get debt off its books. "AT&T said the full value of the media transaction includes not just the equity value but also the cash AT&T will receive for divesting itself of the business," The Wall Street Journal said Tuesday.
AT&T is returning to what it knows best - wireless and broadband. "Its executives acknowledged the whiplash felt by employees still adjusting to the many changes the telecom company spurred over the past three years," the Journal said.
Meanwhile, CNBC's Jim Cramer slammed AT&T as a disgrace after the company announced it would spin off WarnerMedia to merge the business and create an entertainment giant with Discovery.
He also took aim at those calling the move "transformational." He said AT&T took on too much debt three years ago to purchase Time Warner for $85 billion.
"It's not a transformational deal...it's the final act of one of the dumbest mergers in recent history," the "Mad Money" host said. "The truth is, AT&T made a boneheaded decision and now they're paying for it, but in corporate America, no one really pays for it, no one's even allowed to say it, no one's allowed to admit it."
Wow. Dropped like an AT&T phone call when you still have four bars. https://t.co/J8Fi63TGjO — Last Week Tonight (@LastWeekTonight) May 17, 2021
Cramer is a U.S. television personality and host of Mad Money on CNBC. He is a former hedge fund manager as well as an author and a joint founder of TheStreet.com.
The WarnerMedia-Discovery tie-up will give AT&T shareholders a significant stake in the new company and ends AT&T's experiment of a vertically integrated content and distribution company. AT&T will get $43 billion in an aggregate of cash, debt securities, and WarnerMedia retains certain debt under the transaction, which is expected to close about a year from now.