AT&T to Mix WarnerMedia Property With Discovery

Shares of AT&T rose Monday, whereas Discovery’s inventory slipped after an early rise. Discovery’s market worth traded above $17 billion. AT&T, which pulls most of its income from the telecommunications enterprise, had a roughly $240 billion market worth. The brand new media enterprise will maintain just a little greater than $55 billion of debt, Mr. Zaslav stated.

AT&T Chief Govt John Stankey stated in an internet information convention Monday that he had been “considering the construction of our enterprise for a while” and finally determined that the pairing with Mr. Zaslav’s firm would profit each events.

Mr. Zaslav, a media mogul and longtime buddy of WarnerMedia govt and CNN boss Jeff Zucker, stated the transaction got here collectively over a number of months of talks that included chats within the Discovery chief’s Greenwich Village brownstone.

Mr. Zaslav stated the mixed entities spend $20 billion on content material, a stage that tops Netflix Inc.’s latest programming finances. WarnerMedia owns cable channels reminiscent of HBO, CNN, TNT and TBS in addition to the Warner Bros. tv and movie studio. Discovery has a portfolio that features its namesake community and HGTV.

Each corporations additionally supply streaming video portals that compete with bigger on-demand providers like Netflix and Walt Disney Co. ’s Disney+. The 2 CEOs declined to element their long-term plans for HBO Max and Discovery+, which may stay separate or be mixed into a good bigger on-line video library.

“You gotta have content material folks love a lot they might run dwelling and pay for it earlier than they pay for dinner or a roof over their head,” Mr. Zaslav stated on a name with traders.

Underneath the deal, AT&T shareholders will maintain a 71% stake within the new entity, whereas Discovery shareholders personal a 29% stake. In alternate, AT&T stated it’s going to obtain $43 billion of money, debt securities and WarnerMedia’s retention of sure debt.

AT&T additionally signaled it’s going to minimize its dividend to replicate its smaller measurement as soon as the media enterprise is carved out right into a separate firm. The Dallas firm stated it expects an annual dividend payout ratio of 40% to 43% from greater than $20 billion of anticipated free money move, implying a complete payout of between $Eight billion and $8.6 billion. That cost to shareholders would quantity to just a little over half what traders have collected from the media and telecom conglomerate in previous years.

AT&T reported $169 billion of internet debt on the finish of March, a stage that has troubled some traders anxious in regards to the conglomerate’s monetary flexibility. AT&T Finance Chief Pascal Desroches stated in an interview Monday that the Discovery deal would permit the telecom firm to succeed in its debt-reduction goal a yr forward of schedule.

The transaction unwinds a hard-fought acquisition that AT&T closed for about $81 billion in 2018 after beating a court docket problem by U.S. Justice Division officers, who argued that the mix would damage competitors within the pay-TV market.

The telecom firm on the time managed the nation’s largest pay-TV distribution community, principally by way of DirecTV, earlier than it added one of many largest cable channel house owners.

The deal unveiled Monday will full AT&T’s retreat from the media enterprise. The corporate earlier this yr reached an settlement with private-equity agency TPG to shed a 30% stake in its DirecTV enterprise for $1.Eight billion. AT&T had acquired DirecTV in 2015 for $49 billion, on the top of a pay-TV market that has since collapsed attributable to cord-cutting subscribers.

AT&T, in the meantime, faces mounting calls for on the wi-fi and broadband networks that also generate most of its earnings. The corporate spent greater than $23 billion on a latest Federal Communications Fee public sale of wi-fi licenses and might want to spend tens of billions of {dollars} extra within the coming years to match investments by rivals Verizon Communications Inc. and T-Cell US Inc. in enhancing their networks.

AT&T on Monday stated it could enhance its deliberate capital expenditures to about $24 billion a yr as soon as the transaction closes. Executives earlier this yr projected $18 billion of capital spending in 2021.

The businesses stated they anticipate to shut the transaction in mid-2022.

AT&T shares had been up almost 2%, and Discovery shares had been down greater than 2% after the premarket surge.

For WarnerMedia, entry to Discovery’s in style unscripted and actuality content material will give it programming that it desperately must compete with Netflix, Disney+ and different streaming platforms. Unscripted programming has change into a very talked-about asset on streaming websites, notably at Netflix. Whereas HBO Max has some unscripted programing, Discovery has an enormous library of content material together with “90 Day Fiancé” and “Diners, Drive-Ins and Dives.”

The mixed corporations additionally could have an enormous footprint in sports activities, notably abroad. Discovery has a long-term worldwide rights settlement for the Olympics and has been aggressive in buying rights to different main European sports activities and occasions.

WarnerMedia has rights to the Nationwide Basketball Affiliation, the “March Insanity” faculty basketball match and a few playoff baseball. It not too long ago signed a seven-year deal to hold Nationwide Hockey League video games.

“We’re fairly flush with sports activities rights,” Mr. Zaslav stated on the decision with traders.

He stated that sturdy relationships with the inventive neighborhood will probably be his prime precedence when he assumes management of the brand new firm.

Underneath Mr. Kilar, expertise relations between WarnerMedia and the inventive neighborhood have been strained due partly to selections relating to the distribution of theatrical films up to now yr.

—Ben Mullin, Dana Cimilluca and Nina Trentmann contributed to this text.

Write to Drew FitzGerald at andrew.fitzgerald@wsj.com, Cara Lombardo at cara.lombardo@wsj.com and Joe Flint at joe.flint@wsj.com