AT&T Inc. plans to spin off its WarnerMedia unit in a proposed combination with Discovery Inc. that would see the formation of a standalone company.
Should the deal close, the Dallas-based telecommunications and media giant would receive $43 billion in an all-stock, Reverse Morris Trust transaction that would also leave AT&T shareholders as 71% owners and Discovery shareholders as 29% owners in the all-new “pure play” entertainment platform.
The direct-to-consumer company would combine WarnerMedia assets with Discovery’s nonfiction and international entertainment and sports businesses. AT&T and Discovery project 2023 revenue for the new company at $52 billion with EBITDA of $14 billion.
The AT&T team was led internally by Troy Hatch, senior vice president and assistant general counsel; Michael Pratt, vice president and associate general counsel; Terry Velesiotis, assistant vice president and senior legal counsel; Brandon Satterwhite, assistant vice president and senior legal counsel; and David McAtee, senior executive vice president and general counsel.
For outside counsel, AT&T relied on New York-based Sullivan & Cromwell as legal advisor and LionTree and Goldman Sachs & Co. as financial advisors.
Historically, AT&T has tapped Sullivan & Cromwell to lead its larger M&A transactions, including its $85 billion acquisition of Time Warner that resulted in the creation of WarnerMedia alongside Arnold & Porter. The deal for Time Warner, which was first announced in 2016, required AT&T to combat the U.S. Department of Justice when antitrust claims arose tied mainly to fears around surges in prices that could negatively impact consumers. AT&T’s current chief executive, John Stankey, headed up WarnerMedia upon its inception as the traditional telecommunications company sought to find footing in the fast-changing landscape.
The Sullivan & Cromwell team was led by a corporate team including Los Angeles partner Eric M. Krautheimer, New York Melissa Sawyer, and Los Angeles special counsel Matthew C. Barnett, with New York partner Isaac J. Wheeler advising on tax matters, New York partner Ari B. Blaut advising on finance matters, New York partner Matthew M. Friestedt advising on financial compensation, and Palo Alto partner Nader A. Mousavi advising on intellectual property.
Debevoise & Plimpton, headquartered in New York, served as legal counsel to Discovery, while Allen & Co. and J.P. Morgan Securities acted as financial advisors.
M&A partners Jonathan Levitsky, Sue Meng and Jeffrey Rosen led the Debevoise team.
Discovery’s independent directors tapped Perella Weinberg Partners and Wachtell Lipton, Rosen & Katz to advise.
Wachtell Lipton corporate lawyers Andrew J. Nussbaum, Theodore N. Mirvis and Karessa L. Cain, all of New York, led the transaction for the firm.
The $43 billion price tag for AT&T’s WarnerMedia – a portfolio of thousands of hours of content tied to entertainment, news and sports brands, such as HBO, CNN and Warner Bros. – comes from a combination of cash, debt securities and WarnerMedia’s retention of certain debt.
JPMorgan Chase Bank and affiliates of Goldman Sachs & Co. will provide the secured, fully committed financing for WarnerMedia for funding the distributions.
The deal is expected to provide some relief to the debt burden – estimated at about $157 billion by Edward Jones in a March analyst note – that AT&T has been looking to shed over the past few years.
AT&T sees the spinoff as a boon to shareholders, sharpening the investment focus and attracting unique investors for each entity, with two companies focused on separate initiatives: broadband connectivity and media. AT&T said that, upon close of the deal, it would be one of the best capitalized companies in the 5G and fiber broadband space in the country.
Boards of directors for both companies have already approved the transaction.
Shareholders of AT&T do not need to approve the transaction, though Discovery’s do. Agreements are in place with Discovery’s shareholders John Malone, chairman of Liberty Media Corp., and Advance to vote in favor of the transaction.
RBC Capital Markets counseled Advance on financial matters. Robert B. Schumer, Ariel J. Deckelbaum, Cullen L. Sinclair and Kristiina Leskinen of New York-based Paul, Weiss, Rifkind, Wharton & Garrison provided legal counsel to Advance.
The board of directors of the new company will also reflect the shareholder ownership structure with seven members selected by AT&T, including the chairman post, and six members selected by Discovery, including David Zaslav, the president and CEO of Discovery who will act as leader of the new company.