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AT&T to Merge WarnerMedia Unit With Discovery in $43 Billion Deal

Discovery and AT&T shares both surge after AT&T says it will merge its WarnerMedia unit with Discovery in a $43 billion reverse stock-and-debt transaction.

AT&T  (T) - Get AT&T Inc. Report said Monday it has agreed to merge its WarnerMedia unit with Discovery  (DISCA) - Get Warner Bros Discovery Inc Com Ser A Report in a $43 billion deal that will combine media powerhouses CNN, HBO and the Cartoon Network with HGTV, the Food Network and Animal Planet.

The announcement sparked a surge in the stock prices of both media giants.

Under the terms of the agreement, which is structured as an all-stock, so-called Reverse Morris Trust transaction, AT&T will receive $43 billion in a combination of cash and debt. 

As part of the deal, AT&T will unwind its $85 billion acquisition of Time Warner, which closed just under three years ago, and form a new media company with Discovery. The deal would create a new business, separate from AT&T, that could be valued at as much as $150 billion, including debt, according to media reports.

Boards of both AT&T and Discovery have approved the transaction, the companies said in a statement. Discovery President and CEO David Zaslav will lead the new company with executives from both companies taking on key leadership roles.

AT&T's shareholders will receive stock representing 71% of the new company; Discovery shareholders will own 29% of the new company. 

A deal between WarnerMedia and Discovery, whose portfolio includes its namesake network and the popular HGTV network that focuses on everything from house-flipping to storage-locker bidding to pimple-popping, further consolidates a media business buffeted by cord-cutting and competition from streaming video.

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It also creates an entertainment tie-up that can better compete with the likes of streaming media giant Walt Disney  (DIS) - Get The Walt Disney Company Report, whose arsenal includes Disney+, as well as streaming content juggernauts Netflix  (NFLX) - Get Netflix Inc. Report and Amazon  (AMZN) - Get Inc. Report's Prime Video.

AT&T and Discovery said the new company "will have significant scale and investment resources," with projected 2023 revenue of approximately $52 billion, adjusted earnings before income, taxes, depreciation and amortization of approximately $14 billion, and a free cash flow conversion rate of approximately 60%.

The companies see at least $3 billion in expected cost synergies annually.

Both Discovery and AT&T have been building up their media offerings in recent years, with AT&T snapping up Time Warner Inc. in 2018, allowing it to provide movies and shows from Warner Bros., HBO and Turner, including TBS and TNT channels, along with targeted entertainment from Bleacher Report, FilmStruck and Otter Media.

At the same time, it already has raised questions among analysts and investors over duplicity, and whether the likes of Discovery+ and HBO Max – two separate streaming services that would be owned by one parent - would continue to operate separately or be combined.

Discovery last month posted weaker-than-expected first-quarter earnings as Discovery+ growth eroded profits. AT&T last month reported quarterly earnings that beat forecasts on strong HBO Max subscriber growth.

At last check, shares of Discovery were up 6.82% at $38.08 after surging almost 17% in premarket trading. Shares of AT&T were up 4.14% at $33.58.