After a day of digesting the news and reading tea leaves, industry insiders were focused on the timing of WarnerMedia CEO Jason Kilar’s departure and the size of his severance package after one year and two weeks on the job.
Another surprise that emerged from the fine print on the deal was the changes it signaled for John Malone, the Liberty Media and former TCI baron who is a longtime investor as an individual in Discovery. The transaction has all the hallmarks of a Malone-engineered deal in that shareholders avoid taxes through the complicated structure known as a Reverse Morris Trust, a process which allows AT&T to spinoff WarnerMedia as a separate entity that will then merge with Discovery.
The surprise came with the news that Malone and another longtime Discovery shareholder, Advance/Newhouse (the holding company for the Newhouses of Conde Nast fame), have given up their preferred voting shares to help smooth the road for the transaction. When the deal is done the combined Discovery WarnerMedia will have only one class of stock with no preferred voting rights for any shareholders. That will make it more palatable to institutional investors — and yes, it will also make it easier for the new company to be acquired some day.
Malone and Advance/Newhouse at present together controlled 44% of the voting rights in Discovery. Malone will be on the enlarged company’s board of directors but won’t have special rights beyond the economic value of the shares that he owns. The $43 billion to be paid to AT&T in cash and stock will leave AT&T shareholders with 71% of the merged company while Discovery shareholders keep 29%. It’s unclear how much of that 29% is owned by Malone and Advance/Newhouse and how those preferred shares will be converted to common stock.
Another telling detail was found in the “repped by” credits for the bankers on the deal. LionTree, the boutique media investment firm headed by Aryeh Bourkoff, has been Malone’s banker since the day the firm was founded in 2012. But LionTree was listed as a financial advisor to AT&T alongside Goldman Sachs, not Malone or Discovery.
Bourkoff worked with AT&T on the transaction to better understand AT&T’s needs and the assets to carved out for the new entity. Bourkoff declined to elaborate on the deal other than to say that was the right move for both companies. AT&T gets some debt relief that it desperately needs while retaining the majority of a company with strong potential, and AT&T gets a proven media CEO in David Zaslav, who has led Discovery since 2007.
“The shift from linear to digital requites greater scale and enhanced financial flexibility. That goes hand in hand with unlocking shareholder value,” Bourkoff told Variety. “And it requires industry participants working together in a collaborative way for the greater good.”
Meanwhile, the focus in Hollywood was on the short-term fate of Kilar, the former Hulu leader who rattled the industry after taking the reins of WarnerMedia on May 1, 2020. Although Kilar was hand-picked for his WarnerMedia role by AT&T CEO John Stankey, the move to hand the keys to Zaslav and his Discovery is a clear sign that AT&T had fading confidence in WarnerMedia’s ability to compete as is.
Moreover, industry sources say the strategic move that made such a splash last December — when WarnerMedia at Kilar’s direction opted for simultaneous releases in theaters and on HBO Max for Warner Bros.’ 2021 movie slate — is seen as a major misstep because it is shaping up to cost the studio over $1 billion in lost box office revenue, talent profit participation payments and in high license fees paid for the movies from HBO Max. Unless the pace of HBO Max subscriber additions pick up significantly in the coming months, the high cost of the movie content for the streamer will be hard to justify.
Given the situation and the fact that he was kept in the dark about the Discovery talks, it’s no surprise that Kilar is said to be planning his exit from WarnerMedia. Kilar received a grant of AT&T stock options valued at $48 million at the time he joined WarnerMedia in a contract dated March 20, 2020 for a May 1 start date. Those options are scheduled to vest annually in one-quarter increments over a four-year period ending on Feb. 15, 2024. He will surely keep those options, although the ultimate value will depend on the grant price and the performance of the enlarged company’s shares at the time of vesting.
Per the contract severance terms, Kilar also appears to be entitled to receive at least $5 million from AT&T — his base salary of $2.5 million and cash bonus target of $2.5 million — for at least one more year on his contract. He would be eligible for more payments had his tenure last two years or more. Kilar is also subject to a one-year non-compete clause and a one-year ban on him soliciting WarnerMedia employees for other ventures.
(Pictured: Jason Kilar)