AT&T is combining its massive media operations that include CNN, HBO, TNT and TBS in a $43 billion deal with Discovery, the owner of lifestyle networks including the Food Network and HGTV.
The deal announced Monday would create a separate media company with households increasingly abandoning cable and satellite TV. Broadcast media is under significant threat from Netflix, Amazon Prime Video, Facebook, TikTok and YouTube. Faced with cord-cutting and incursions by streaming services, major broadcast media companies have retrenched and sought strength through mergers.
In the all-stock deal, AT&T will receive $43 billion in a combination of cash, debt securities, and WarnerMedia's retention of certain debt. AT&T shareholders will receive stock representing 71% of the new company and Discovery stockholders will own 29% of the new company.
AT&T had pushed into the streaming sector through HBO Max, a direct competitor with Netflix, Apple, Disney and Comcast. Discovery launched a standalone streaming service called discovery+ this year.
The new company will be able to invest more in original streaming content. It will house almost 200,000 hours of programming and bring together more than 100 brands under one global portfolio, including: DC Comics, Cartoon Network, Eurosport, Magnolia, TLC and Animal Planet.
AT&T shareholders will own 71% of the combined company after the deal is complete, and Discovery investors will hold 29%, according to investment bank Raymond James.
Craig Moffett, an analyst with MoffettNathanson Research, said in a note to investors that the deal "makes strategic sense" for both Discovery and AT&T, with the former benefiting from being able to add CNN, Cartoon Network and HBO Max as well as TV rights to MLB, NBA, NFL and other sports content to its new streaming service, Discovery+.
"Simply put, Discovery+ becomes a more relevant service for a wider group of people in the world," Moffett said.
The deal to give up its media business marks a major shift by AT&T, which fought hard to push a transaction through in 2018 to buy Time Warner for $85.4 billion with the Justice Department trying to block the deal for anti-competitive reasons. AT&T's move to spin off its media assets will bolster the telecom giant's balance sheet and let it focus on building out its 5G network, Moffett said.
AT&T earlier this year also spun off satellite TV provider DirecTV, which it had bought in 2015 for $48.5 billion, in a deal with private equity firm TPG.
"The deal follows a continued simplification of AT&T's assets and divestiture strategy beginning with the spin-off of DIRECTV with private equity firm TPG," Raymond James analysts said in a report.
Discovery President and CEO David Zaslav will lead the new company. The deal is expected to close by the middle of next year. It still needs approval from Discovery shareholders. AT&T stockholders don't need to vote on the transaction.