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WarnerMedia, Discovery to Merge

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AT&T will combine the two companies in a $43B deal.

AT&T and Discovery have announced a definitive agreement to combine WarnerMedia's entertainment, sports and news assets with Discovery's nonfiction and international entertainment and sports businesses to create a standalone global entertainment company.

Under the terms of the agreement, which is structured as an all-stock, Reverse Morris Trust transaction, AT&T would receive $43 billion (subject to adjustment) in a combination of cash, debt securities and WarnerMedia's retention of certain debt, and AT&T's shareholders would receive stock representing 71 percent of the new company; Discovery shareholders would own 29 percent of the new company. The Boards of Directors of both AT&T and Discovery have approved the transaction.

"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," says John Stankey, chief executive officer, AT&T. "It will support the fantastic growth and international launch of HBO Max with Discovery's global footprint and create efficiencies which can be re-invested in producing more great content to give consumers what they want."

Forming a new company through the deal has given the companies a projected 2023 revenue of approximately $52 billion, adjusted EBITDA of roughly $14 billion, and an industry-leading Free Cash Flow conversion rate of approximately 60 percent. In addition, the new company will invest in more original content for its streaming services, enhance the programming options across its global linear pay TV and broadcast channels and offer more video experiences and consumer choices.

The companies announced that Discovery president and chief executive officer David Zaslav would lead the proposed new company with a management team and operational and creative leadership from both companies. In addition, the new company's Board of Directors will consist of 13 members, seven initially appointed by AT&T, including the chairperson of the board; Discovery will initially appoint six members, including chief executive officer David Zaslav.

"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," says Zaslav. "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."

The combination will be executed through a Reverse Morris Trust, under which WarnerMedia will be spun or split off to AT&T's shareholders via dividend or through an exchange offer or a combination of both and simultaneously combined with Discovery.

In connection with the spin-off or split-off of WarnerMedia, AT&T will receive $43 billion (subject to adjustment) in a combination of cash, debt securities and WarnerMedia's retention of a particular debt. In addition, WarnerMedia has secured fully committed financing from JPMorgan Chase Bank, N.A. and affiliates of Goldman Sachs & Co. to fund the distribution.

LionTree LLC and Goldman Sachs & Co. served as financial advisors and Sullivan & Cromwell acted as legal advisors to AT&T.

Allen & Company and J.P. Morgan Securities served as financial advisors and Debevoise & Plimpton served as legal advisors to Discovery. Peralla Weinberg Partners and Wachtell Lipton, Rosen & Katz served as advisors to the Independent Directors of Discovery.

RBC Capital Markets served as financial advisors and Paul, Weiss, Rifkind, Wharton & Garrison LLP served as legal advisors to Advance.

The transaction is anticipated to close in mid-2022, subject to approval by Discovery shareholders and customary closing conditions, including receipt of regulatory approvals. AT&T shareholders require no vote. Agreements are in place with Dr. John Malone and Advance to vote in favor of the transaction.

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