Discovery, AT&T’s WarnerMedia Talks Collapsed In April Before They Clinched May Deal, According To Massive SEC Filing

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A mammoth SEC filing by Discovery today offers some tidbits on its upcoming merger with WarnerMedia – like the new Nasdaq stock symbol, WBD – and pages detailing back-and- forth calls between David Zaslav and AT&T CEO John Stankey starting in February when the Discovery boss first reached out.

They spoke, they met in early March, hired investment banks and signed an NDA, haggled over terms and then shut down it all down in mid-April. The disagreement was over 1) how shares of the new company would be split between AT&T vs Discovery shareholders, and 2) the amount of debt WarnerMedia would be saddled with when it was handed over.

“Mr. Zaslav initially proposed that AT&T’s stockholders would receive 65% of the outstanding shares of the combined company post-closing on a fully diluted basis, with Discovery stockholders holding the remaining 35%, and that the WarnerMedia Business would be transferred to Discovery with debt in the amount of $40 to $42 billion. Mr. Stankey noted that AT&T’s position was that AT&T’s stockholders should receive 75% of the outstanding shares of the combined company post-closing on a fully diluted basis. Mr. Zaslav indicated that Discovery would not be willing to accept AT&T’s proposal.”

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According to the nearly 700-page filing, they came back to the table several times, finally agreeing that AT&T’s stockholders would receive 71% and load WarnerMedia with $43 billion in debt.

The deal was announced in May, a triumph for Zaslav, who will be CEO of the combined entity, and a black eye for AT&T, coming only three years after it closed its acquisition of Time Warner. It is being studied by regulators and expected to close in mid-2022. Discovery stockholders will vote on it at a special virtual shareholders meeting date TBA. The two largest, Advance/Newhouse and John Malone have agreed to support it, the former receiving a hefty payment.

Shareholders are also being asked to vote for executive compensation and severance, so-called golden parachutes, although the numbers are not yet including in this preliminary filing. The executive team has not been named save for Zaslav and Discovery CFO Gunnar Wiedenfels, who will keep the same role.

Streaming is driving the merger. HBO Max launched in May of 2020, Discovery+ in January of 2021.  The filing said WBD “expects to develop and implement a go-to-market strategy for its DTC products that coordinates and/or combines its offering of discovery+ and HBO Max” but gave no details on what or how, which is what everyone is wondering.

There were some internal WarnerMedia financials, including a projection that its revenue would hit $45 billion by 2025 (from $28.2 billion last year).

The filing said Discovery incurred $47 million and WarnerMedia $17 million of transaction-related costs during the nine months ended September. The number are expected to rise to $107 million and $86 million, respectively by the time the deal closes.

As of November 1, WarnerMedia had 29,000 employees around the world, with 68% of them in the U.S.

If Discovery backs out, it would owe AT&T a $720 million termination fee. If AT&T walks, it will be on the hook for $1.77 billion

If neither happens, the complex deal calls for AT&T to transfer WarnerMedia’s assets and liabilities to a temporary entity called “Spinco,” which will in turn pay AT&T $30 billion, plus an additional $13 billion in debt instruments that AT&T will transfer to one or more investment banks in exchange for debt obligations.

Spinco stock will then be either 1) be distributed to AT&T shareholders pro rata or 2) delivered in an exchange offer followed by a pro rata distribution of any remaining shares if the exchange offer isn’t fully subscribed. AT&T will decide which based on market conditions prior to the closing.

Discovery will rename itself Warner Bros. and reclassify and convert its stock into stock of WBD.

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