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AT&T to focus on fibre, 5G after WarnerMedia merger with Discovery

Media mega-deal presents leading US operator with opportunity to unlock value and be one of the best capitalised broadband companies

Hot on the heels of arch-rival Verizon divesting its media assets to focus on core networking activities, AT& T has revealed a mega-deal of its own, generating as much as $43bn through the merger of its WarnerMedia premium entertainment, sports and news business with Discovery Inc.

The deal is being described as monumental and likely to lead to a reshaping of the media landscape. It will see AT&T shareholders receive stock representing 71% of the new company and Discovery shareholders 29%.

AT&T and Discovery say the new company will have significant scale and investment resources, with projected 2023 revenue of about $52bn, adjusted EBITDA of about $14bn and a free cash flow conversion rate of around 60%.

AT&T said that for the company and its shareholders, the transaction provides an opportunity to unlock value in its media assets and to better position the media business to take advantage of the attractive direct-to-consumer subscription video-on-demand trends in the industry. It also believes the transaction will allow it to capitalise better the longer-term demand for connectivity, allowing stepped-up investment in growth areas, in particular mobile and fixed broadband.

It added that the move will also create a capital structure improvement after closing, and will position AT&T as one of the best capitalised 5G and fibre broadband companies in the US.

“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,” said AT&T CEO John Stankey.

“It will support the fantastic growth and international launch of HBO Max with Discovery’s global footprint and create efficiencies that can be re-invested in producing more great content to give consumers what they want. For AT&T shareholders, this is an opportunity to unlock value and be one of the best capitalised broadband companies, focused on investing in 5G and fibre to meet substantial, long-term demand for connectivity.

“AT&T shareholders will retain their stake in our leading communications company that comes with an attractive dividend. Plus, they will get a stake in the new company, a global media leader that can build one of the top streaming platforms in the world.”

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The deal is expected to close in mid-2022, subject to approval by Discovery shareholders and customary closing conditions, including receipt of regulatory approvals. No vote is required by AT&T shareholders.

The merger has received an almost instant universal welcome from the business analyst and financial communities. For Kester Mann, director, consumer and connectivity at CCS Insight, the deal, more particularly the refocus on core communications, represented a tacit recognition from AT&T that its lavish acquisition strategy to assemble an empire of media holdings had “spectacularly failed” to achieve its objectives.

AT&T is determined to take on giant streaming providers such as Netflix and Disney, but clearly feels it is unable to take this leap alone as the market for consuming content continues to evolve,” said Mann. “AT&T has been facing a dilemma familiar to many other large telecom operators – does it sharpen its focus on fixed-line and mobile networks to offer best-in-class connectivity amid questionable long-term return, or place bold risks on fuelling new revenue from adjacent areas such as content?

“The company’s decision to work with Discovery to better maximise its media assets is a strong clue to where its priorities lie.”

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