Warner Bros. Discovery, Inc 8-K/A, filed Apr 15, 2022
Warner Bros. Discovery, Inc. (WBD)
About this 8-K/A
Warner Bros. Discovery, Inc filed this 8-K/A on April 15, 2022, reporting on events of April 7, 2022.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 12, 2022 (
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Introductory Note
On April 12, 2022, Warner Bros. Discovery, Inc. (“WBD” or the “Company”), formerly known as Discovery, Inc. (“Discovery”), filed a Current Report on Form 8-K (the “Original Form 8-K”) to report, among other things, that it had completed the previously announced combination (the “Merger”) of Discovery and the WarnerMedia business (the “WarnerMedia Business”) of AT&T Inc. (“AT&T”) pursuant to (1) that certain Agreement and Plan of Merger, dated as of May 17, 2021 (as amended, the “Merger Agreement”), by and among Discovery, Drake Subsidiary, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Discovery, AT&T and Magallanes, Inc., a Delaware corporation and formerly a wholly owned subsidiary of AT&T (“Spinco”), (2) that certain Separation and Distribution Agreement, dated as of May 17, 2021 (as amended, the “Separation Agreement”), by and among Discovery, AT&T and Spinco, and (3) certain other agreements in connection with the transactions contemplated by the Merger Agreement and the Separation Agreement.
The Original Form 8-K omitted the financial statements of the business acquired and the pro forma combined financial information as permitted by Item 9.01(a)(3) and Item 9.01(b)(2) of Form 8-K. This Amendment No. 1 to the Original Form 8-K (this “Form 8-K/A”) is being filed solely for the purpose of amending Items 9.01(a) and (b) to provide the financial statements and pro forma financial information required by Item 9.01 of Form 8-K. The Original Form 8-K otherwise remains the same and the Items therein, including Item 9.01, are hereby incorporated by reference into this Form 8-K/A.
The pro forma financial information included as Exhibit 99.2 to this Form 8-K/A has been presented for illustrative purposes only, as required by Form 8-K, and is not intended to, and does not purport to, represent what the combined company’s actual results or financial condition would have been if the transactions had occurred on the relevant date, and is not intended to project the future results or financial condition that the combined company may achieve following the Merger.
| Item 9.01. | Financial Statements and Exhibits. |
(a) Financial statements of business acquired.
The audited combined financial statements and related notes of the WarnerMedia Business as of December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019 are attached to this Current Report on Form 8-K/A as Exhibit 99.1 and incorporated herein by reference.
(b) Pro forma financial information.
The unaudited pro forma condensed combined financial statements of the Company and the WarnerMedia Business are attached to this Current Report on Form 8-K/A as Exhibit 99.2 and incorporated herein by reference.
| (d) | Exhibits |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Date: April 15, 2022 | WARNER BROS. DISCOVERY, INC. | |||||
| By: | /s/ Gunnar Wiedenfels | |||||
| Name: Gunnar Wiedenfels | ||||||
| Title: Chief Financial Officer | ||||||
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (No. 333-231160) on Form S-3 of Warner Bros. Discovery, Inc. of our report dated March 4, 2022, relating to the combined financial statements of the WarnerMedia Business as of December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019 appearing in this Current Report on Form 8-K/A of Warner Bros. Discovery, Inc.
/s/ Ernst & Young LLP
Dallas, Texas
April 15, 2022
Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF WARNER BROS. DISCOVERY, INC. (F/K/A DISCOVERY, INC.) AND THE WARNERMEDIA BUSINESS
On April 8, 2022 (the “Closing Date”), Warner Bros. Discovery, Inc. (“WBD” or the “Company”), formerly known as Discovery, Inc. (“Discovery”), and AT&T Inc. (“AT&T”) completed the previously disclosed transactions contemplated by (1) that certain Agreement and Plan of Merger, dated as of May 17, 2021 (as amended, the “Merger Agreement”), by and among Discovery, Drake Subsidiary, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Discovery (“Merger Sub”), AT&T and Magallanes, Inc., a Delaware corporation and formerly a wholly owned subsidiary of AT&T (“Spinco”), (2) that certain Separation and Distribution Agreement, dated as of May 17, 2021 (as amended, the “Separation Agreement”), by and among Discovery, AT&T and Spinco, and (3) certain other agreements in connection with the transactions contemplated by the Merger Agreement and the Separation Agreement. Specifically, (1) AT&T transferred the business, operations and activities that constitute the WarnerMedia segment of AT&T (the “WarnerMedia Business”), subject to certain exceptions as set forth in the Separation Agreement, to Spinco (the “Separation”), (2) thereafter, on the Closing Date, AT&T distributed to its stockholders all of the shares of common stock, par value $0.01 per share, of Spinco (“Spinco common stock”) held by AT&T by way of a pro rata dividend such that each holder of shares of common stock, par value $1.00 per share, of AT&T (“AT&T common stock”) was entitled to receive one share of Spinco common stock for each share of AT&T common stock held as of the record date, April 5, 2022 (the “Distribution”), and (3) following the Distribution, Merger Sub merged with and into Spinco, with Spinco surviving as a wholly owned subsidiary of the Company (the “Merger”). Pursuant to the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of Spinco common stock on the Closing Date was automatically converted into the right to receive 0.241917 shares of Series A common stock, par value $0.01 per share, of WBD (“WBD common stock”). In addition, pursuant to the Separation Agreement and prior to the Distribution, on the Closing Date, Spinco made a cash payment to AT&T of approximately $28.9 billion (the “Special Cash Payment”), which is subject to certain post-closing adjustments pursuant to the terms of the Separation Agreement.
On the Closing Date and prior to the effective time of the Merger, the Company amended and restated its restated certificate of incorporation, as amended, to, among other things, (1) change its name to Warner Bros. Discovery, Inc. and (2) automatically reclassify and convert each share of Discovery’s Series A common stock, par value $0.01 per share (“Discovery Series A common stock”), Discovery’s Series B common stock, par value $0.01 per share (“Discovery Series B common stock”), Discovery’s Series C common stock, par value $0.01 per share (“Discovery Series C common stock”), Discovery’s Series A-1 convertible participating preferred stock, par value $0.01 per share (“Discovery Series A-1 preferred stock”), and Discovery’s Series C-1 convertible participating preferred stock, par value $0.01 per share (“Discovery Series C-1 preferred stock”), into such number of shares of WBD common stock as set forth in the Merger Agreement (the “Reclassification”). The Separation, Distribution, Merger, Special Cash Payment, Reclassification and other transactions contemplated by the definitive agreements entered into in connection with the Merger are collectively referred to herein as the “Transactions.” The Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on April 12, 2022 and Registration Statement on Form S-4 (Reg. No. 333-261188), as amended, which was declared effective by the SEC on February 10, 2022, set forth certain additional information regarding the Transactions.
The unaudited pro forma condensed combined financial statements presented below are derived from the historical consolidated financial statements of Discovery and the historical combined financial statements of the WarnerMedia Business. The unaudited pro forma condensed combined financial statements and the notes thereto have been prepared to illustrate the estimated effects of the Transactions in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses”. Release No. 33-10786 replaced the existing pro forma adjustment criteria with simplified requirements to depict the accounting for the transaction (“Transaction Accounting Adjustments”) and present the reasonably estimable synergies and other transaction effects that have occurred or are reasonably expected to occur (“Management’s Adjustments”). WBD has elected not to present Management’s Adjustments and only presents Transaction Accounting Adjustments in the unaudited pro forma
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condensed combined financial statements. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2021 combines the historical consolidated statement of operations of Discovery and the historical combined statement of operations of the WarnerMedia Business, giving effect to the Transactions as if they had occurred on January 1, 2021. The unaudited pro forma condensed combined balance sheet as of December 31, 2021 combines the historical consolidated balance sheet of Discovery and the historical combined balance sheet of the WarnerMedia Business, giving effect to the Transactions as if they had occurred on December 31, 2021. Refer to Note 1 - Basis of Presentation for additional information.
The unaudited pro forma condensed combined financial statements should be read in conjunction with the historical financial statements of Discovery and the WarnerMedia Business referenced below:
| • | Discovery’s audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2021, which are included in Discovery’s Annual Report on Form 10-K for the year ended December 31, 2021, filed on February 24, 2022; |
| • | The WarnerMedia Business’s audited combined financial statements and the notes thereto as of December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019 included elsewhere in this document. |
The historical combined financial statements of the WarnerMedia Business have been derived from the consolidated financial statements and accounting records of AT&T, as if the WarnerMedia Business’s operations had been conducted independently from those of AT&T. The combined financial statements of the WarnerMedia Business are presented on a “carve-out” basis in accordance with generally accepted accounting principles in the United States (“GAAP”). The historical combined statements of operations include all revenues and costs directly attributable to the WarnerMedia Business, gains and losses on dispositions prior to the Transactions, as well as an allocation of expenses related to corporate finance, human resources, business development, legal, treasury, real estate, external affairs, compliance, and other shared services. Expenses that are specifically identifiable to the WarnerMedia Business are directly recorded to the combined statement of operations. The remaining expenses are primarily allocated on the basis of the relative percentage of expected revenue generated. The WarnerMedia Business considers these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, the WarnerMedia Business. The historical combined balance sheets include all assets and liabilities that reside within the WarnerMedia Business legal entities. Assets and liabilities in shared entities were included in the historical combined balance sheets to the extent the asset or liability is primarily used by the WarnerMedia Business. Adjustments were made to certain assets and liabilities and associated depreciation or amortization for any specific assets or liabilities retained by AT&T and its affiliates (other than the WarnerMedia Business), subsidiaries sold or approved to be sold by AT&T and its affiliates (other than the WarnerMedia Business) prior to the Transactions, and the elimination of certain pension and post-retirement assets and obligations to be retained by AT&T based on specific identification. The allocations may not reflect the expenses the WarnerMedia Business would have incurred as a standalone entity for the periods presented. As a result, the combined financial statements may not be indicative of the WarnerMedia Business’s financial condition, results of operations or cash flows had it operated as a standalone entity during the periods presented, and the results stated in the combined financial statements are not indicative of the WarnerMedia Business’s future financial condition, results of operations or cash flows.
As part of a separate reporting segment of AT&T, the WarnerMedia Business has been able to receive services from AT&T. Following the Transactions, WBD will need to replace these services either by providing them internally from WBD’s existing services or by obtaining them from unaffiliated third parties. These services include certain corporate level functions of which the effective and appropriate performance was and is critical to the operations of the WarnerMedia Business prior to the Merger and WBD following the Merger. AT&T will provide certain services on a transitional basis pursuant to the Transition Services Agreement (“TSA”), dated as of the Closing Date, by and between AT&T Services, Inc. and Spinco, for a term as set out in the TSA. WBD may be unable to replace these services in a timely manner or on terms and conditions as favorable as those the WarnerMedia Business received from AT&T. The costs for these services could in the aggregate be higher than the combination of WBD’s current costs and those reflected in the historical combined financial statements of the WarnerMedia Business.
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The unaudited pro forma condensed combined financial statements have been prepared using the acquisition method of accounting in accordance with ASC 805, Business Combinations, (“ASC 805”) with Discovery as the accounting acquirer of the WarnerMedia Business. In identifying Discovery as the accounting acquirer, WBD’s conclusion is based primarily upon the following facts: (1) Discovery initiated the Transactions, was the legal acquirer of Spinco, and transferred equity consideration to Spinco stockholders, (2) AT&T received approximately $38.9 billion, which includes the $28.9 billion Special Cash Payment and $10.0 billion of Spinco Debt Securities (as defined below), in addition to WBD’s assumption of approximately $1.6 billion of existing debt of the WarnerMedia Business as part of its disposition of the WarnerMedia Business, (3) the Chief Executive Officer of Discovery is continuing as Chief Executive Officer of WBD for a substantial period of time after the Transactions and will be primarily responsible for appointing the rest of the executive management team of WBD, and the Chief Financial Officer of Discovery is serving as Chief Financial Officer of WBD, (4) no stockholder or group of stockholders held a controlling interest in WBD, and a key Discovery stockholder held the largest minority interest in WBD, immediately after the completion of the Transactions, and (5) AT&T has no input on the strategic direction and management of WBD after the completion of the Transactions. The above facts were deemed to outweigh the fact that the holders of shares of Spinco common stock that received shares of WBD common stock in the Merger owned in the aggregate a majority of WBD common stock on a fully diluted basis and associated voting rights immediately after the Merger.
The pro forma purchase price allocation of the WarnerMedia Business’s assets acquired and liabilities assumed is based on preliminary estimates of the fair values of the assets acquired and liabilities assumed, and the unaudited pro forma condensed combined financial statements are based upon available information and certain assumptions of WBD management as of the date of this document. The completion of the valuation, accounting for the Transactions and the allocation of the purchase price may be different than that of the amounts reflected in the pro forma purchase price allocation, and any differences could be material. Such differences could affect the purchase price and allocation of the purchase price, which may affect the value assigned to the tangible or intangible assets and amount of depreciation and amortization expense recorded in the unaudited pro forma condensed combined statement of operations.
The unaudited pro forma adjustments represent WBD management’s estimates based on information available as of the date of this document and are subject to change as additional information becomes available and analyses are performed. However, WBD management believes that the assumptions provide a reasonable basis for presenting the significant effects of the Transactions, and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined financial statements. Transaction Accounting Adjustments are intended to represent the necessary adjustments to account for the Transactions.
The unaudited pro forma condensed combined financial statements do not give effect to the potential impact of current financial conditions, or any anticipated revenue enhancements, cost savings or operating synergies that may result from the Merger. No Management Adjustments related to forward-looking information were included in the unaudited pro forma condensed combined financial statements and accompanying explanatory notes.
The unaudited pro forma condensed combined financial statements are presented for informational purposes only and are not necessarily indicative of the financial position or results that would have occurred had the events been consummated as of the dates indicated, nor are they indicative of any future results.
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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 2021
(In millions)
| Historical | Transaction Accounting Adjustments | |||||||||||||||||||||
| Discovery | WarnerMedia Business after Reclassification Adjustments (Note 2) |
Pre-Merger Adjustments (Note 3) |
Merger Adjustments |
Notes | Pro Forma Combined |
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| ASSETS |
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| Current assets: |
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| Cash and cash equivalents |
$ | 3,905 | $ | 1,879 | $ | 1,102 | $ | (1,287 | ) | 6i | $ | 5,599 | ||||||||||
| Receivables, net |
2,446 | 4,310 | — | (37 | ) | 6b | 6,719 | |||||||||||||||
| Content rights and prepaid license fees, net |
245 | 1 | — | — | 246 | |||||||||||||||||
| Prepaid expenses and other current assets |
668 | 1,767 | (9 | ) | 1,287 | 6i | 3,713 | |||||||||||||||
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| Total current assets |
7,264 | 7,957 | 1,093 | (37 | ) | 16,277 | ||||||||||||||||
| Film and television library, net |
3,832 | 22,901 | — | 1,374 | 5a, 5b, 6b | 28,107 | ||||||||||||||||
| Property and equipment, net |
1,336 | 4,238 | — | (121 | ) | 5c | 5,453 | |||||||||||||||
| Goodwill |
12,912 | 39,692 | — | (19,000 | ) | 5h | 33,604 | |||||||||||||||
| Intangible assets, net |
6,317 | 36,312 | — | 19,207 | 5a | 61,836 | ||||||||||||||||
| Other noncurrent assets |
2,766 | 6,741 | — | (324 | ) | 5d, 6d | 9,183 | |||||||||||||||
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| Total assets |
$ | 34,427 | $ | 117,841 | $ | 1,093 | $ | 1,099 | $ | 154,460 | ||||||||||||
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| LIABILITIES AND EQUITY |
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| Current liabilities: |
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| Accounts payable and accrued liabilities |
$ | 2,642 | $ | 11,019 | $ | — | $ | 264 | 5g, 6a, 6b, 6d, 6e | $ | 13,925 | |||||||||||
| Deferred revenues |
478 | 1,287 | — | (3 | ) | 6b | 1,762 | |||||||||||||||
| Current portion of debt |
339 | 10 | — | — | 349 | |||||||||||||||||
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| Total current liabilities |
3,459 | 12,316 | — | 261 | 16,036 | |||||||||||||||||
| Noncurrent portion of debt |
14,420 | 1,713 | 39,796 | 356 | 5e | 56,285 | ||||||||||||||||
| Deferred income taxes |
1,225 | 11,361 | — | 4,961 | 5f, 6c | 17,547 | ||||||||||||||||
| Other noncurrent liabilities |
1,927 | 7,177 | — | 45 | 5g, 6d, 6f | 9,149 | ||||||||||||||||
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| Total liabilities |
21,031 | 32,567 | 39,796 | 5,623 | 99,017 | |||||||||||||||||
| Redeemable noncontrolling interests |
363 | — | — | — | 363 | |||||||||||||||||
| Equity: |
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| Discovery Inc. stockholders’ equity |
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| Series A-1 convertible preferred stock |
— | — | — | — | — | |||||||||||||||||
| Series C-1 convertible preferred stock |
— | — | — | — | — | |||||||||||||||||
| Series A common stock |
2 | — | — | (2 | ) | 4 | — | |||||||||||||||
| Series B convertible common stock |
— | — | — | — | — | |||||||||||||||||
| Series C common stock |
5 | — | — | (5 | ) | 4 | — | |||||||||||||||
| WBD common stock |
— | — | — | 24 | 4 | 24 | ||||||||||||||||
| Additional paid-in capital |
11,086 | — | — | 43,160 | 4, 6g, 6h | 54,246 | ||||||||||||||||
| Treasury stock, at cost |
(8,244 | ) | — | — | — | (8,244 | ) | |||||||||||||||
| Net parent investment |
— | 85,356 | (38,703 | ) | (46,653 | ) | 4 | — | ||||||||||||||
| Retained earnings |
9,580 | — | — | (1,130 | ) | 6a, 6e, 6f, 6g, 6h | 8,450 | |||||||||||||||
| Accumulated other comprehensive loss |
(830 | ) | (82 | ) | — | 82 | 4 | (830 | ) | |||||||||||||
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| Total stockholders’ equity |
11,599 | 85,274 | (38,703 | ) | (4,524 | ) | 53,646 | |||||||||||||||
| Noncontrolling interests |
1,434 | — | — | — | 1,434 | |||||||||||||||||
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| Total equity |
13,033 | 85,274 | (38,703 | ) | (4,524 | ) | 55,080 | |||||||||||||||
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| Total liabilities and equity |
$ | 34,427 | $ | 117,841 | $ | 1,093 | $ | 1,099 | $ | 154,460 | ||||||||||||
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See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part hereof. The pro forma adjustments are explained in the notes below.
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2021
(In millions, except per share amounts)
| Historical | Transaction Accounting Adjustments | |||||||||||||||||||||||
| Discovery after Reclassification |
WarnerMedia Reclassification |
Pre-Merger Adjustments |
Merger Adjustments |
Notes | Pro Forma Combined |
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| (Note 2) | (Note 2) | (Note 3) | ||||||||||||||||||||||
| Revenues: |
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| Advertising |
$ | 6,215 | $ | 4,404 | $ | — | $ | (18 | ) | 6m | $ | 10,601 | ||||||||||||
| Distribution |
5,207 | 15,594 | — | — | 20,801 | |||||||||||||||||||
| Content |
675 | 12,575 | — | (112 | ) | 6m | 13,138 | |||||||||||||||||
| Other |
94 | 899 | — | — | 993 | |||||||||||||||||||
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| Total revenues |
12,191 | 33,472 | — | (130 | ) | 45,533 | ||||||||||||||||||
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| Costs and expenses: |
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| Costs of revenues, excluding depreciation and amortization |
4,620 | 20,194 | — | 405 | 5, 6m | 25,219 | ||||||||||||||||||
| Selling, general and administrative |
4,016 | 7,506 | — | 1,226 | 6j, 6k, 6m | 12,748 | ||||||||||||||||||
| Depreciation and amortization |
1,582 | 3,852 | — | 3,774 | 5 | 9,208 | ||||||||||||||||||
| Restructuring and other charges |
32 | 12 | — | 53 | 6l | 97 | ||||||||||||||||||
| (Gain) loss on disposition |
(71 | ) | 223 | — | — | 152 | ||||||||||||||||||
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| Total costs and expenses |
10,179 | 31,787 | — | 5,458 | 47,424 | |||||||||||||||||||
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| Operating income (loss) |
2,012 | 1,685 | — | (5,588 | ) | (1,891 | ) | |||||||||||||||||
| Interest expense, net |
(633 | ) | (368 | ) | (1,554 | ) | — | (2,555 | ) | |||||||||||||||
| Loss on extinguishment of debt |
(10 | ) | — | — | — | (10 | ) | |||||||||||||||||
| Income (loss) from equity investees, net |
(18 | ) | 8 | — | — | (10 | ) | |||||||||||||||||
| Other income, net |
82 | 192 | — | — | 274 | |||||||||||||||||||
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| Income (loss) before income taxes |
1,433 | 1,517 | (1,554 | ) | (5,588 | ) | (4,192 | ) | ||||||||||||||||
| Income tax (expense) benefit |
(236 | ) | (261 | ) | 388 | 1,200 | 6n | 1,091 | ||||||||||||||||
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| Net income (loss) |
1,197 | 1,256 | (1,166 | ) | (4,388 | ) | (3,101 | ) | ||||||||||||||||
| Net income attributable to noncontrolling interest |
(138 | ) | — | — | — | (138 | ) | |||||||||||||||||
| Net income attributable to redeemable noncontrolling interest |
(53 | ) | — | — | — | (53 | ) | |||||||||||||||||
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| Net income (loss) attributable to common stockholders |
$ | 1,006 | $ | 1,256 | $ | (1,166 | ) | $ | (4,388 | ) | $ | (3,292 | ) | |||||||||||
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| Net income (loss) per share available to common stockholders: |
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| Basic |
$ | 1.55 | 7 | $ | (1.36 | ) | ||||||||||||||||||
| Diluted |
$ | 1.54 | 7 | $ | (1.36 | ) | ||||||||||||||||||
| Weighted average shares outstanding: |
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| Basic |
503 | 7 | 2,422 | |||||||||||||||||||||
| Diluted |
664 | 7 | 2,422 | |||||||||||||||||||||
See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part hereof. The pro forma adjustments are explained in the notes below.
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(In millions, except per share amounts)
Note 1—Basis of Presentation
The unaudited pro forma condensed combined financial statements are based on the historical consolidated financial statements of Discovery and historical combined financial statements of the WarnerMedia Business. The unaudited pro forma condensed combined balance sheet as of December 31, 2021 gives effect to the Transactions as if they had occurred on December 31, 2021. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2021 gives effect to the Transactions as if they had occurred on January 1, 2021. The historical financial statements have been adjusted in the unaudited pro forma condensed combined financial statements to give pro forma effect to Transaction Accounting Adjustments that reflect the accounting for the Transactions under GAAP and in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses.”
The unaudited pro forma condensed combined financial statements and the notes thereto were prepared using the acquisition method of accounting in accordance with ASC 805, with Discovery as the accounting acquirer of the WarnerMedia Business. The acquisition method of accounting, based on ASC 805, uses the fair value concepts defined in ASC 820, Fair Value Measurement (“ASC 820”). Fair value is defined in ASC 820 as the “price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of an asset or liability. Market participants are assumed to be buyers or sellers in the most advantageous market for the asset or liability. Fair value measurement for an asset assumes the highest and best use by these market participants, and as a result, assets may be required to be recorded which are not intended to be used or sold or at a fair value measurement that does not reflect management’s intended use for those assets. Fair value measurements can be highly subjective, and it is possible the application of reasonable judgment could develop different assumptions resulting in a range of alternative estimates using the same facts and circumstances. ASC 805 requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at fair value as of the merger date, with any excess purchase price allocated to goodwill.
As of the date of this document, the accompanying unaudited pro forma purchase price allocation is preliminary and is subject to further adjustments as additional information becomes available and as additional analyses and final valuations are completed. The potential changes to the purchase price allocation and related pro forma adjustments could be material.
For the purpose of preparing the unaudited pro forma condensed combined financial statements, WBD management has conducted a preliminary analysis of the adjustments required to conform the WarnerMedia Business’s financial statements to reflect the current accounting policies of WBD. This assessment is ongoing and, at the time of preparing the unaudited pro forma condensed combined financial statements, WBD management is not aware of any material accounting policy differences not yet adjusted in the unaudited pro forma condensed combined financial statements. WBD management is currently performing a full and detailed review of the WarnerMedia Business’s accounting policies to determine if differences in accounting policies or financial statement classification exist that may require adjustments to or reclassification of the WarnerMedia Business’s results of operations, assets or liabilities to conform to WBD’s accounting policies and classifications. As a result of that review, differences may be identified that, when conformed, could have a material impact on the unaudited pro forma condensed combined financial statements.
Certain reclassifications have been made to the historical presentation of the WarnerMedia Business to conform to the presentation used in the unaudited pro forma condensed combined financial statements (see Note 2). These reclassifications have no impact on the historical net income, total assets, liabilities or equity reported by the WarnerMedia Business.
The unaudited pro forma condensed combined financial statements also do not reflect any anticipated revenue enhancements, cost savings, or operating synergies that WBD may achieve as a result of the Merger, the total expected costs to integrate the operations of WBD and the WarnerMedia Business, or the total expected
6
costs necessary to achieve such revenue enhancements, cost savings, or operating synergies. WBD has elected not to present Management’s Adjustments and only presents Transaction Accounting Adjustments in the unaudited pro forma condensed combined financial statements.
The preparation of unaudited pro forma condensed combined financial statements requires WBD management to make estimates and assumptions that affect the amounts reported in such financial statements and the notes thereto. These unaudited pro forma condensed combined financial statements, including the preliminary purchase price allocation, are presented for illustrative purposes only and do not necessarily reflect the operating results or financial position that would have occurred if the Transactions had been completed on the dates indicated, nor is it necessarily indicative of the results of operations or financial condition that may be expected for any future period or date. Accordingly, such information should not be relied upon as an indicator of future performance, financial condition, or liquidity.
Note 2—Reclassification Adjustments
Certain reclassifications have been made on a preliminary basis to the historical presentation of the combined statement of operations and combined balance sheet of the WarnerMedia Business included within the unaudited pro forma condensed combined financial statements to conform to the financial statement presentation of WBD. As of the date of this document, WBD management is currently performing a full and detailed review of the WarnerMedia Business’s accounting policies and historical financial statement presentation. As a result of that review, WBD may identify additional differences between the accounting policies and financial statement presentation of the two companies that, when conformed, could have a material impact on the consolidated financial statements of WBD. The following tables indicate the reclassification and conforming adjustments made for the purpose of the unaudited pro forma condensed combined financial statements included in this document.
7
WarnerMedia Business’s Balance Sheet Reclassifications
As of December 31, 2021
(In millions)
| Historical WarnerMedia Business |
Reclassification Adjustments |
Notes | Historical WarnerMedia Business after Reclassification Adjustments |
|||||||||||
| ASSETS |
||||||||||||||
| Current assets: |
||||||||||||||
| Cash and cash equivalents |
$ | 1,879 | $ | — | $ | 1,879 | ||||||||
| Accounts receivables, net |
4,399 | (4,399 | ) | 1, 2 | — | |||||||||
| Receivables, net |
— | 4,310 | 1, 9 | 4,310 | ||||||||||
| Related party accounts receivable |
593 | (593 | ) | 9 | — | |||||||||
| Content rights and prepaid license fees, net |
— | 1 | 4 | 1 | ||||||||||
| Prepaid expenses |
590 | (590 | ) | 3 | — | |||||||||
| Other current assets |
496 | (496 | ) | 4, 5 | — | |||||||||
| Prepaid expenses and other current assets |
— | 1,767 | 2, 3, 5 | 1,767 | ||||||||||
|
|
|
|
|
|
|
|||||||||
| Total current assets |
7,957 | — | 7,957 | |||||||||||
| Noncurrent inventories and theatrical film and television production costs |
18,923 | (18,923 | ) | 6 | — | |||||||||
| Film and television library, net |
— | 22,901 | 6, 7, 8 | 22,901 | ||||||||||
| Property and equipment, net |
4,238 | — | 4,238 | |||||||||||
| Goodwill |
39,692 | — | 39,692 | |||||||||||
| Trademarks and tradenames, net |
16,688 | (16,688 | ) | 11 | — | |||||||||
| Other intangible assets, net |
11,643 | (11,643 | ) | 7, 12 | — | |||||||||
| Distribution networks, net |
11,942 | (11,942 | ) | 13 | — | |||||||||
| Intangible assets, net |
— | 36,312 | 11, 12, 13 | 36,312 | ||||||||||
| Investments, including available-for-sale securities |
1,388 | (1,388 | ) | 15 | — | |||||||||
| Operating lease right-of-use assets |
2,357 | (2,357 | ) | 10 | — | |||||||||
| Other assets |
3,013 | (3,013 | ) | 8, 14 | — | |||||||||
| Other noncurrent assets |
— | 6,741 | 10, 14, 15 | 6,741 | ||||||||||
|
|
|
|
|
|
|
|||||||||
| Total assets |
$ | 117,841 | $ | — | $ | 117,841 | ||||||||
|
|
|
|
|
|
|
|||||||||
| LIABILITIES AND EQUITY |
||||||||||||||
| Current liabilities: |
||||||||||||||
| Accounts payable and accrued liabilities |
$ | 10,652 | $ | 367 | 18, 19 | $ | 11,019 | |||||||
| Related party accounts payable |
88 | (88 | ) | 18 | — | |||||||||
| Debt maturing within one year |
10 | (10 | ) | 16 | — | |||||||||
| Deferred revenues |
— | 1,287 | 17 | 1,287 | ||||||||||
| Current portion of debt |
— | 10 | 16 | 10 | ||||||||||
| Other current liabilities |
1,566 | (1,566 | ) | 17, 19 | — | |||||||||
|
|
|
|
|
|
|
|||||||||
| Total current liabilities |
12,316 | — | 12,316 | |||||||||||
| Long-term debt |
1,713 | (1,713 | ) | 20 | — | |||||||||
| Noncurrent portion of debt |
— | 1,713 | 20 | 1,713 | ||||||||||
| Deferred income taxes |
11,361 | — | 11,361 | |||||||||||
| Postemployment benefit obligation |
75 | (75 | ) | 21 | — | |||||||||
| Other noncurrent liabilities |
7,102 | 75 | 21 | 7,177 | ||||||||||
|
|
|
|
|
|
|
|||||||||
| Total liabilities |
32,567 | — | 32,567 | |||||||||||
|
|
|
|
|
|
|
|||||||||
| Equity: |
||||||||||||||
| Net parent investment |
85,356 | — | 85,356 | |||||||||||
| Accumulated other comprehensive loss |
(82 | ) | — | (82 | ) | |||||||||
|
|
|
|
|
|
|
|||||||||
| Total equity |
85,274 | — | 85,274 | |||||||||||
|
|
|
|
|
|
|
|||||||||
| Total liabilities and equity |
$ | 117,841 | $ | — | $ | 117,841 | ||||||||
|
|
|
|
|
|
|
|||||||||
8
WarnerMedia Business’s Statement of Operations Reclassifications
For the year ended December 31, 2021
(In millions)
| Historical WarnerMedia Business |
Reclassification Adjustments |
Notes | Historical WarnerMedia Business after Reclassification Adjustments |
|||||||||||||
| Operating revenues: |
||||||||||||||||
| Advertising revenue |
$ | 4,357 | $ | 47 | 23 | $ | 4,404 | |||||||||
| Distribution revenue |
— | 15,594 | 22, 23 | 15,594 | ||||||||||||
| Subscription revenue |
12,585 | (12,585 | ) | 22 | — | |||||||||||
| Content revenue |
12,016 | 559 | 23 | 12,575 | ||||||||||||
| Related party revenue |
3,615 | (3,615 | ) | 23 | — | |||||||||||
| Other revenue |
899 | — | 899 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total operating revenue |
33,472 | — | 33,472 | |||||||||||||
| Operating expenses: |
||||||||||||||||
| Cost of revenues |
19,472 | 722 | 25, 26 | 20,194 | ||||||||||||
| Selling, general and administrative expenses |
7,142 | 364 | 25, 29 | 7,506 | ||||||||||||
| Depreciation and amortization expense |
4,551 | (699 | ) | 26 | 3,852 | |||||||||||
| Restructuring and other charges |
— | 12 | 29 | 12 | ||||||||||||
| Related party expense |
399 | (399 | ) | 25 | — | |||||||||||
| Loss on disposition |
— | 223 | 27 | 223 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total operating expense |
31,564 | 223 | 31,787 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Operating income (loss) |
1,908 | (223 | ) | 1,685 | ||||||||||||
| Interest expense, net |
(142 | ) | (226 | ) | 28 | (368 | ) | |||||||||
| Income from equity investees, net |
— | 8 | 24 | 8 | ||||||||||||
| Other income (expense), net |
(249 | ) | 441 | 24, 27, 28 | 192 | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Income before income taxes |
1,517 | — | 1,517 | |||||||||||||
| Income tax expense |
(261 | ) | — | (261 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income |
$ | 1,256 | $ | — | $ | 1,256 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
The following items represent certain reclassifications and conforming adjustments to accounting policies of the historical financial statement line items of the WarnerMedia Business to conform to the expected financial statement line items of WBD including:
Balance sheet items:
| 1. | Accounts receivables, net, of $3,717 million have been reclassified to Receivables, net; |
| 2. | Production receivables of $682 million included within Accounts receivable, net have been reclassified to Prepaid expenses and other current assets; |
| 3. | Prepaid expenses of $590 million have been reclassified to Prepaid expenses and other current assets; |
| 4. | Content rights of $1 million included within Other current assets have been reclassified to Content rights and prepaid license fees, net; |
| 5. | Other current assets of $495 million have been reclassified to Prepaid expenses and other current assets; |
| 6. | Noncurrent inventories and theatrical film and television production costs of $18,923 million have been reclassified to Film and television library, net; |
| 7. | Noncurrent inventories and theatrical film and television production costs of $3,961 million included within Other intangible assets, net have been reclassified to Film and television library, net; |
| 8. | Noncurrent sports licensing rights of $17 million included in Other assets have been reclassified to Film and television library, net; |
| 9. | Related party accounts receivables of $593 million have been reclassified to Receivables, net; |
| 10. | Operating lease right-of-use assets of $2,357 million have been reclassified to Other noncurrent assets; |
| 11. | Trademarks and tradenames, net of $16,688 million have been reclassified to Intangible assets, net; |
| 12. | Other intangible assets, net of $7,682 million have been reclassified to Intangible assets, net; |
| 13. | Distribution networks, net of $11,942 million have been reclassified to Intangible assets, net; |
| 14. | Other assets of $2,996 million have been reclassified to Other noncurrent assets; |
9
| 15. | Investments, including available for sale securities of $1,388 million, have been reclassified to Other noncurrent assets; |
| 16. | Debt maturing in a year of $10 million has been reclassified into Current portion of debt; |
| 17. | Deferred revenues of $1,287 million included in Other current liabilities have been reclassified into Deferred revenues; |
| 18. | Related party accounts payable of $88 million has been reclassified to Accounts payable and accrued liabilities; |
| 19. | Accounts payable and accrued liabilities of $279 million included within Other current liabilities has been reclassified to Accounts payable and accrued liabilities; |
| 20. | Long-term debt of $1,713 million has been reclassified to Noncurrent portion of debt; |
| 21. | Postemployment benefit obligation of $75 million has been reclassified to Other noncurrent liabilities. |
Statement of operations items:
| 22. | Subscription revenue of $12,585 million for the year ended December 31, 2021 has been reclassified to Distribution revenue; |
| 23. | Related party revenue of $3,009 million for the year ended December 31, 2021 has been reclassified to Distribution revenue; Related party revenue of $559 million for the year ended December 31, 2021 has been reclassified to Content revenue, and Related party revenue of $47 million for the year ended December 31, 2021 has been reclassified to Advertising revenue; |
| 24. | Income from equity method investments of $8 million for the year ended December 31, 2021 has been reclassified from Other income (expense), net to Income from equity investees, net; |
| 25. | Related party expense of $376 million for the year ended December 31, 2021, has been reclassified to Selling, general and administrative expense, and Related party expense of $23 million for the year ended December 31, 2021 has been reclassified to Cost of revenues; |
| 26. | Based on WBD’s accounting policy, content assets and noncurrent content rights, including historic fair market value adjustments from prior acquisitions, are included within Film and television library, net, with any related amortization of film and television library included in Cost of revenues. The WarnerMedia Business historically considered released television and film content acquired in a business combination as an acquired intangible asset included in Other intangible assets, net, and any related amortization of released television and film content acquired in a business combination was included within Depreciation and amortization expense. Amortization expense related to released television and film content acquired in a business combination of $699 million included within Depreciation and amortization expense for the year ended December 31, 2021 has been reclassified to Cost of revenues in order to conform to the accounting policies of WBD; |
| 27. | Loss on disposition of $223 million included within Other income (expense), net for the year ended December 31, 2021 has been reclassified to Loss on disposition; |
| 28. | Financing fees of $226 million included within Other income (expense), net included for the year ended December 31, 2021 have been reclassified to Interest expense, net; |
| 29. | Restructuring and other charges of $12 million included in Selling, general and administrative expense for the year ended December 31, 2021 have been reclassified to Restructuring and other charges. |
The following table represents certain reclassifications of Discovery’s historical financial statement line items to conform to the expected financial statement line items of WBD.
10
Discovery’s Statement of Operations Reclassifications
For the year ended December 31, 2021
(In millions)
| Historical Discovery |
Reclassification Adjustments |
Notes | Historical Discovery after Reclassification Adjustments |
|||||||||||||
| Revenues: |
||||||||||||||||
| Advertising |
$ | 6,215 | $ | — | $ | 6,215 | ||||||||||
| Distribution |
5,409 | (202 | ) | 30 | 5,207 | |||||||||||
| Content |
— | 675 | 30 | 675 | ||||||||||||
| Other |
567 | (473 | ) | 30 | 94 | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total revenues |
12,191 | — | 12,191 | |||||||||||||
| Costs and expenses: |
||||||||||||||||
| Costs of revenues, excluding depreciation and amortization |
4,620 | — | 4,620 | |||||||||||||
| Selling, general and administrative |
4,016 | — | 4,016 | |||||||||||||
| Depreciation and amortization |
1,582 | — | 1,582 | |||||||||||||
| Restructuring and other charges |
32 | — | 32 | |||||||||||||
| Gain on disposition |
(71 | ) | — | (71 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total costs and expenses |
10,179 | — | 10,179 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Operating income |
2,012 | — | 2,012 | |||||||||||||
| Interest expense, net |
(633 | ) | — | (633 | ) | |||||||||||
| Loss on extinguishment of debt |
(10 | ) | — | (10 | ) | |||||||||||
| Loss from equity investees, net |
(18 | ) | — | (18 | ) | |||||||||||
| Other income, net |
82 | — | 82 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Income before income taxes |
1,433 | — | 1,433 | |||||||||||||
| Income tax expense |
(236 | ) | — | (236 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income |
1,197 | — | 1,197 | |||||||||||||
| Net income attributable to noncontrolling interests |
(138 | ) | — | (138 | ) | |||||||||||
| Net income attributable to redeemable noncontrolling interests |
(53 | ) | — | (53 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income attributable to Discovery, Inc. |
$ | 1,006 | $ | — | $ | 1,006 | ||||||||||
|
|
|
|
|
|
|
|||||||||||
Statement of operations items:
| 30. | Content-related revenues of $675 million for the year ended December 31, 2021 have been reclassified from Other revenue and Distribution revenue into Content revenue. Other revenue reclassified into Content revenue primarily related to licensing agreements for sports rights. Distribution revenue reclassified into Content revenue primarily related to international program sales and licensing arrangements. |
Note 3—Pre-Merger Adjustments
The Separation Agreement required that Spinco (1) make, immediately prior to the Distribution, the Special Cash Payment in the amount of approximately $30.0 billion in cash to AT&T, subject to adjustment, including: (a) upwards or downwards adjustment depending on the extent that the actual net working capital of Spinco and its subsidiaries (after giving effect to the Separation, the “Spinco Group”) as of immediately prior to the Distribution was greater or less than, respectively, specified target amounts of net working capital for the Spinco Group as of such time, (b) downwards adjustment to the extent members of the Spinco Group were liable for indebtedness as of immediately prior to the Distribution other than the Spinco Debt Financing (as defined in the Separation Agreement), including a downwards adjustment for the $1.6 billion of existing debt already assumed by the Spinco Group as a liability of the WarnerMedia Business (a “WarnerMedia Liability”), (c) upwards adjustment to reimburse AT&T with respect to Spinco Designated Transaction Expenses (as defined in the Separation Agreement) incurred or payable by AT&T or paid by Spinco prior to the closing of the Merger (the
11
“Closing”) and (d) increased by certain tax sharing amounts (if any) in respect of distributions in respect of drawing on the bridge facility in lieu of a debt exchange (the “Additional Bridge Funding Tax Liability”) and (2)(a) issue to AT&T the Spinco Debt Securities that satisfy the Par Exchange Requirement (as defined in the Merger Agreement), (b) distribute to AT&T all or a portion of the proceeds from the borrowing by Spinco under the Spinco Financing Agreements (as defined in the Merger Agreement) and/or use all or a portion of the cash proceeds of such borrowing to purchase assets of the WarnerMedia Business from AT&T or (c) undertake a combination of the actions described in (2)(a) and (2)(b) such that AT&T received, in the aggregate, approximately $13.0 billion, subject to adjustment (the “Additional Amount”). In addition, there would have been a purchase price reduction of approximately $175 million per month accruing after the satisfaction of all regulatory approvals other than the receipt of a private letter ruling from the Internal Revenue Service regarding the qualification of the Distribution and certain related Transactions for tax-free treatment (the “IRS Ruling”) until such IRS Ruling was received. The IRS Ruling was received on December 28, 2021 and therefore there was no such purchase price reduction.
The Special Cash Payment was made immediately prior to the Distribution based on estimates of the adjustment items set forth in the preceding paragraph. To the extent the actual amounts in respect of those items differ from the estimates utilized in the calculation of the Special Cash Payment paid immediately prior to the Distribution, the parties will make a subsequent corrective payment following the Closing. In addition to this corrective payment for the Special Cash Payment, there are two other post-Closing adjustments that may be made: (1) a payment by either AT&T or WBD to the other based on the aggregate actual (a) marketing expenses of the WarnerMedia Business for the global HBO/HBO Max business and (b) cash programming and production expenditures of the WarnerMedia Business between January 1, 2021 and immediately prior to the Distribution, that is less than or greater than a target threshold, respectively, and (2) a payment by AT&T of any after-tax cash proceeds received between the date of the Separation Agreement and immediately prior to the Distribution for the sale of any business included in the WarnerMedia Business (subject to specified exceptions). If the parties are unable to agree on such amounts following the completion of the Transactions, the Separation Agreement provides that the parties will engage a nationally known independent accounting firm mutually agreed in writing by the parties, which firm shall not be the then regular auditors of, or have any material relationship with, AT&T, Spinco or Discovery to resolve the matters in dispute on a binding basis.
On March 4, 2022, AT&T provided notice that its good faith estimate of the aggregate basis for U.S. federal income tax purposes of the assets to be contributed to Spinco pursuant to the Separation Plan is $33.0 billion. Consequently, the Special Cash Payment was adjusted to approximately $33.0 billion, subject to further adjustment, and the Additional Amount was adjusted to approximately $10.0 billion. On the Closing Date, Spinco made the Special Cash Payment to AT&T of approximately $28.9 billion, subject to post-Closing adjustments pursuant to the terms of the Separation Agreement.
On March 15, 2022, Spinco issued $30.0 billion in aggregate principal amount of Spinco Notes (as defined below), including Spinco Debt Securities in an aggregate principal amount of $10.0 billion issued to AT&T, and AT&T completed the Securities Exchange (as defined below).
The estimated amount for the adjustment to the Special Cash Payment pursuant to the Separation Agreement, as detailed below, was $4,102 million. The Spinco Expense Reimbursement includes estimated financing fees related to the Bridge Loans (as defined below), Spinco Term Loan Credit Agreement (as defined below), and Spinco Notes, and other estimated expenses considered Spinco Designated Transaction Expenses. Existing Spinco Indebtedness is existing debt assumed by the Spinco Group as a WarnerMedia Liability. The working capital adjustment was preliminarily calculated by AT&T and provided in the estimated closing statement (the “Estimated Closing Statement”) pursuant to the Separation Agreement. This amount is subject to change between the date of this document and the preparation and resolution of the closing statement (the “Closing Statement”) as set forth in the Separation Agreement. Any change to the working capital adjustment could be material. The following table summarizes the calculation of the Special Cash Payment paid immediately prior to the Distribution:
12
| (in millions) | ||||
| Base Cash Dividend Amount(a) |
$ | 33,000 | ||
| Adjustments as per the Separation Agreement |
||||
| Estimated Net Working Capital |
(140 | ) | ||
| Less: Target Net Working Capital |
(3,043 | ) | ||
|
|
|
|||
| Working Capital Adjustment |
(3,183 | ) | ||
| Existing Spinco Indebtedness |
(1,593 | ) | ||
| Spinco Expense Reimbursement |
674 | |||
|
|
|
|||
| Special Cash Payment to AT&T |
$ | 28,898 | ||
|
|
|
|||
| (a) | The Base Cash Dividend Amount, as defined in the Separation Agreement, equals $30.0 billion minus any positive Reallocation Amount, plus the absolute value of any negative Reallocation Amount. The Reallocation Amount (which may be positive or negative) equals (i) $30.0 billion minus (ii) AT&T’s good faith estimate of the aggregate basis for U.S. federal income tax purposes of the assets to be contributed to Spinco pursuant to the Separation Plan. On March 4, 2022, AT&T provided notice that its good faith estimate of the aggregate basis for U.S. federal income tax purposes of the assets to be contributed to Spinco pursuant to the Separation Plan is $33.0 billion, resulting in a negative Reallocation Amount of $3.0 billion and a Base Cash Dividend Amount of $33.0 billion. |
Spinco, in coordination with and at the direction of Discovery, financed the Special Cash Payment and the Additional Amount with the issuance of $40.0 billion of newly issued debt which, together with the Existing Spinco Indebtedness, was assumed or guaranteed by WBD following the Merger. The financing consisted of (1) loans under the Spinco Term Loan Credit Agreement (“Spinco Term Loan Facility”) referred to below in the aggregate principal amount of $10.0 billion and (2) Spinco Notes having an aggregate principal amount of $30.0 billion with terms ranging from two to forty years. Spinco used the net proceeds from the sale of the Spinco Notes (other than the Spinco Debt Securities) and the drawdown on the Spinco Term Loan Credit Agreement to fund in part the Special Cash Payment and for other expenses relating to the Transactions.
Spinco Term Loan Facility
On June 4, 2021, Spinco entered into a $10.0 billion term loan credit agreement (the “Spinco Term Loan Credit Agreement”). The Spinco Term Loan Credit Agreement consists of a $3.0 billion 18-month tranche (“TL Tranche 1”) and $7.0 billion 3-year tranche (“TL Tranche 2”). On April 7, 2022, Spinco borrowed $10.0 billion under the Spinco Term Loan Credit Agreement consisting of the $3.0 billion TL Tranche 1 and $7.0 billion TL Tranche 2, which are expected to have an estimated interest rate of 1.70% and 1.82% per annum, respectively.
Financing fees and debt issuance costs of $25 million were incurred for the Spinco Term Loan Facility. The WarnerMedia Business incurred $7 million of financing fees for the year ended December 31, 2021 and recorded these to Interest expense, net. These costs are not expected to affect the statement of operations beyond 12 months after the Closing Date. The WarnerMedia Business incurred $9 million of debt issuance costs for the year ended December 31, 2021 and recorded these to Prepaid expenses and other current assets on the unaudited pro forma condensed combined balance sheet. A pro forma adjustment was recorded to reclassify debt issuance costs of $9 million from Prepaid expenses and other current assets into Noncurrent portion of debt upon completion of the debt financing. Financing fees and debt issuance costs were paid by AT&T to the lenders and reimbursed by Spinco as part of the Special Cash Payment.
Spinco Notes
On March 15, 2022, Spinco issued senior unsecured notes in an aggregate principal amount of $30.0 billion (the “Spinco Notes”), comprised of the following tranches: (1) $1.75 billion aggregate principal amount of its 3.428% Senior Notes due 2024, (2) $500.0 million aggregate principal amount of its 3.528% Senior Notes due 2024, (3) $1.75 billion aggregate principal amount of its 3.638% Senior Notes due 2025, (4) $500.0 million aggregate principal amount of its 3.788% Senior Notes due 2025, (5) $4.0 billion aggregate principal amount of its 3.755% Senior Notes due 2027, (6) $1.5 billion aggregate principal amount of its 4.054% Senior Notes due 2029 (7) $5.0 billion aggregate principal amount of its 4.279% Senior Notes due 2032, (8) $4.5 billion aggregate principal amount of its 5.050% Senior Notes due 2042, (9) $7.0 billion aggregate principal amount of its 5.141% Senior Notes due 2052, (10) $3.0 billion aggregate principal amount of its 5.391% Senior Notes due 2062 and (11) $500.0 million aggregate principal amount of its Floating Rate Senior Notes due 2024. The Spinco Notes included $10.0 billion in aggregate principal amount issued to AT&T, comprised of the following tranches: (1) $5.0 billion aggregate principal amount of its 4.279% Senior Notes due 2032, (2) $2.0 billion aggregate principal
13
amount of its 5.141% Senior Notes due 2052 and (3) $3.0 billion aggregate principal amount of its 5.391% Senior Notes due 2062 (collectively, the “Spinco Debt Securities”), which AT&T transferred to two investment banks in exchange for a short-term loan to AT&T held by affiliates of such investment banks as principal for their own account (the “Securities Exchange”). The Spinco Notes (including the Spinco Debt Securities) were resold to third-party investors in a private placement exempt from registration in accordance with Rule 144A and Regulation S under the Securities Act of 1933, as amended. Spinco used the net proceeds from the sale of the Spinco Notes (other than the Spinco Debt Securities) to fund in part the Special Cash Payment and for other expenses relating to the Transactions, and AT&T used the Spinco Debt Securities to complete the Securities Exchange. Prior to the completion of the Merger, the Spinco Notes (including the Spinco Debt Securities) were guaranteed by AT&T. In connection with the completion of the Merger, the Spinco Notes (including the Spinco Debt Securities) were guaranteed by WBD, Discovery Communications, LLC and Scripps Networks Interactive, Inc.
Debt issuance costs incurred for the Spinco Notes were approximately $190 million. These costs were paid by AT&T to the lenders and were reimbursed by Spinco as part of the Special Cash Payment.
Bridge Loans
On May 17, 2021, in connection with the entry into the Separation Agreement and the Merger Agreement, Spinco entered into a commitment letter (the “Commitment Letter”) under which JPMorgan Chase Bank, N.A., Goldman Sachs Bank, USA, Goldman Sachs Lending Partners LLC and certain other financial institutions committed to provide to Spinco $41.5 billion in aggregate principal amount of senior unsecured bridge term loans (the “Bridge Loans”). On June 4, 2021, Spinco entered into the Spinco Term Loan Credit Agreement, which reduced the aggregate commitments under the Commitment Letter to $31.5 billion. In connection with the issuance by Spinco, on March 15, 2022, of $30.0 billion in aggregate principal amount of Spinco Notes (including the Spinco Debt Securities) and the Securities Exchange, the aggregate commitments under the Commitment Letter were reduced from an aggregate amount of $31.5 billion to an aggregate amount of approximately $1.7 billion. In connection with the completion of the Transactions, as of the Closing Date, no Bridge Loans under the Commitment Letter were drawn and all of the commitments under the Commitment Letter were fully terminated.
The Separation Agreement provides that certain fees with respect to the financing arrangements that were paid by AT&T prior to the Closing are reimbursed to AT&T by an increase in the amount of the Special Cash Payment paid by Spinco to AT&T prior to the Distribution.
Financing fees of $261 million were incurred for the Bridge Loans. The WarnerMedia Business incurred $219 million of financing fees in relation to the Bridge Loans during the year ended December 31, 2021. These financing fees are included in the unaudited pro forma condensed combined statement of operations and are not expected to affect the statement of operations beyond 12 months after the Closing Date. These financing fees were paid by AT&T and reimbursed by Spinco as part of the Special Cash Payment.
The following pro forma adjustment has been recorded in the unaudited pro forma condensed combined balance sheet in relation to the Spinco Financing:
| (in millions) | As of December 31, 2021 | |||
| Spinco Term Loan Facility |
$ | 10,000 | ||
| Spinco Notes |
30,000 | |||
| Debt issuance costs |
(204 | ) | ||
|
|
|
|||
| Pro forma adjustments to Non-current portion of debt |
$ | 39,796 | ||
|
|
|
|||
A pro forma adjustment has been posted to reflect the incremental interest expense in relation to the Spinco Term Loan Facility and Spinco Notes. The following pro forma adjustment has been recorded in the unaudited pro forma condensed combined statement of operations:
| (in millions) | Year ended December 31, 2021 | |||
| Interest expense on the Spinco Term Loan Facility |
$ | 178 | ||
| Interest expense on the Spinco Notes |
1,344 | |||
| Financing fees for debt financing |
47 | |||
| Amortization of fair value adjustments to debt (see Note 5) |
(15 | ) | ||
|
|
|
|||
| Pro forma adjustments to Interest expense |
$ | 1,554 | ||
|
|
|
|||
14
The weighted-average interest rate on the Spinco Term Loan Facility and Spinco Notes is expected to be 3.81% per annum. For each 0.125% change in the interest rate, interest expense for the Spinco Term Loan Facility and Spinco Notes with variable interest rates would increase or decrease by approximately $13 million for the year ended December 31, 2021. The tax impact of the pro forma adjustment to interest expense was determined by using a blended foreign, federal and state statutory income tax rate of 25.0%.
The following table summarizes the Pre-Merger pro forma adjustments posted to Cash and cash equivalents:
| (in millions) | As of December 31, 2021 | |||
| Proceeds from debt financing |
$ | 30,000 | ||
| Payment of the Special Cash Payment |
(28,898 | ) | ||
|
|
|
|||
| Pro forma adjustment to Cash and cash equivalents(a) |
$ | 1,102 | ||
|
|
|
|||
| (a) | This pro forma adjustment is subject to change materially, depending on the adjustments to the Special Cash Payment discussed above. Spinco, in coordination with and at the direction of WBD, does not expect to increase its leverage or add excess cash for purposes other than required in connection with the completion of the Transactions. As discussed above, the unaudited pro forma condensed combined financial statements reflect that Spinco used the net proceeds from the sale of the Spinco Notes (other than the Spinco Debt Securities) and the drawdown on the Spinco Term Loan Credit Agreement to fund in part the Special Cash Payment and other expenses relating to the Transactions. On March 15, 2022, Spinco issued Spinco Debt Securities in an aggregate principal amount of $10.0 billion to AT&T, comprising the Additional Amount, which was satisfied through the Securities Exchange and accordingly does not directly impact cash and cash equivalents. |
Note 4—Estimated Preliminary Purchase Consideration
At the effective time of the Merger, each issued and outstanding share of Spinco common stock was automatically converted into the right to receive 0.241917 shares of WBD common stock (or cash payment in lieu of fractional shares), based on the calculation of the exchange ratio (the “Exchange Ratio”) set forth in the Merger Agreement. The calculation of the number of shares of WBD common stock to be issued to holders of record of shares of Spinco common stock immediately prior to the effective time of the Merger, as set forth in the Merger Agreement, resulted in Spinco stockholders immediately prior to the Merger collectively owning approximately 71% of the outstanding shares of WBD common stock on a fully diluted basis and existing holders of Discovery capital stock as of immediately prior to the Reclassification and the Merger owning approximately 29% of the outstanding shares of WBD common stock on a fully diluted basis, in each case, excluding any overlaps in the pre-Merger AT&T and Discovery stockholder bases.
The following table represents the preliminary estimate of the purchase consideration paid in the Transactions (in millions, except for per share amounts, exchange ratio and share price):
| Spinco common stock issued and outstanding immediately prior to the Merger |
7,159 | |||
| Exchange Ratio(a) |
0.241917 | |||
| Number of shares of WBD common stock issued in the Merger |
1,732 | |||
| Share price for Discovery Series A common stock(b) |
$ | 24.43 | ||
|
|
|
|||
| Fair value of WBD common stock issued |
$ | 42,309 | ||
| Estimated fair value of share-based compensation awards attributable to pre-combination services(c) |
56 | |||
|
|
|
|||
| Estimated preliminary purchase consideration |
$ | 42,365 | ||
|
|
|
15
| a. | Pursuant to the terms of the Merger Agreement, the Exchange Ratio was calculated as follows: |
| Fully diluted shares of WBD common stock issued and outstanding after Reclassification(1) |
707 | |||
| New Issuance (as defined in the Merger Agreement) ratio pursuant to the terms of the Merger Agreement(2) |
2.448276 | |||
|
|
|
|||
| New Issuance |
1,732 | |||
| Shares of Spinco common stock issued and outstanding immediately prior to the Merger |
7,159 | |||
|
|
|
|||
| Exchange Ratio |
0.241917 | |||
|
|
|
| (1) | Number of shares of Discovery capital stock outstanding (excluding treasury stock) on a fully diluted, as-converted and as-exercised basis (in millions) as of April 8, 2022. The fully diluted number of shares below includes 13 million shares of Discovery Series A common stock issuable upon conversion of equity awards. |
| Series | Number of shares |
Reclassification ratio | Total shares after Reclassification |
|||||||||
| Series A common stock |
183 | 1.0000 | 183 | |||||||||
| Series B convertible common stock |
7 | 1.0000 | 7 | |||||||||
| Series C common stock |
330 | 1.0000 | 330 | |||||||||
| Series A-1 convertible preferred stock |
8 | 13.1135 | 103 | |||||||||
| Series C-1 convertible preferred stock |
4 | 19.3648 | 84 | |||||||||
|
|
|
|||||||||||
| 707 | ||||||||||||
| (2) | The New Issuance (as defined in the Merger Agreement) is equal to the number of fully diluted shares of WBD common stock issued and outstanding after the Reclassification multiplied by the quotient of 71% / 29%. |
| b. | The closing price per share of Discovery Series A common stock reported on the Nasdaq Global Select Market (“Nasdaq”) on April 8, 2022. |
| c. | This amount represents the value of AT&T restricted stock unit awards that were not vested and will be replaced by WBD restricted stock unit awards with the same terms and conditions as the original AT&T award granted. The actual value of these awards will depend on the prices of WBD common stock and AT&T common stock and other valuation estimates and assumptions, and therefore the actual consideration will fluctuate. Accordingly, the final consideration could differ significantly from the current estimate. |
The estimated preliminary purchase consideration reflected in the unaudited pro forma condensed combined financial statements does not purport to represent what the actual purchase consideration was when the Transactions closed. In accordance with ASC 805, the fair value of equity securities issued as part of the consideration paid was measured on the Closing Date at the then-current market price.
In addition, the unaudited pro forma condensed combined balance sheet has been adjusted to eliminate the WarnerMedia Business’s net parent investment, which represents the historical book value of the WarnerMedia Business’s net assets, as a result of the Transactions. The following pro forma adjustments have been recorded to equity balances in the unaudited pro forma condensed combined balance sheet as of December 31, 2021 (in millions):
| Pre-Merger Adjustments |
Removal of the WarnerMedia Business’s equity |
Preliminary purchase consideration issued to Spinco stockholders |
Reclassification and conversion of historical Discovery common stock |
Pro Forma Adjustment |
||||||||||||||||
| WBD common stock |
$ | — | $ | — | $ | 17 | $ | 7 | $ | 24 | ||||||||||
| Additional paid-in capital |
— | — | 42,348 | — | 42,348 | |||||||||||||||
| Net parent investment |
(38,703 | ) | (46,653 | ) | — | — | (85,356 | ) | ||||||||||||
| Accumulated other comprehensive loss |
— | 82 | — | — | 82 | |||||||||||||||
16
Note 5—Estimated Purchase Price Allocation
WBD management has determined that Discovery is the accounting acquirer in the Merger, which will be accounted for under the acquisition method of accounting for business combinations in accordance with ASC 805. The allocation of the preliminary estimated purchase price with respect to the Merger is based upon WBD management’s estimates of and assumptions related to the fair values of assets to be acquired and liabilities to be assumed as of December 31, 2021, using currently available information. Due to the fact that the unaudited pro forma condensed combined financial statements have been prepared based on these preliminary estimates, the final purchase price allocation and the resulting effect on WBD’s financial position and results of operations may differ materially from the pro forma amounts included herein.
As of the date of this document, WBD has not completed a comprehensive final valuation analysis necessary to determine the fair values of the WarnerMedia Business’s identifiable assets acquired and liabilities assumed. The preliminary purchase price allocation presented below is based on WBD management’s estimate of the fair value of tangible and intangible assets acquired and liabilities assumed using information that is currently available. The excess of the purchase price over the fair value of net assets acquired will be allocated to goodwill. The final allocation of the purchase price will be based on a comprehensive final evaluation of tangible and intangible assets acquired and liabilities assumed by WBD.
Significant judgment is required to estimate the fair value of tangible and intangible assets acquired, liabilities assumed, as well as the useful life and pattern of expected benefit for acquired intangible assets. The fair value estimates and useful life for acquired intangible assets are based on available historical information, future expectations, and assumptions deemed reasonable by WBD management, but are inherently uncertain. The preliminary fair values of intangible assets are generally determined using an income method, which is based on forecasts of the expected future cash flows attributable to the respective assets. Preliminary fair values for certain intangibles were determined using a cost approach that measures the value of an asset by estimating the cost to acquire or develop comparable assets. Significant estimates and assumptions inherent in the valuations reflect consideration of other marketplace participants, the amount and timing of future cash flows (including expected growth rates, discount rate and profitability), royalty rates used in the relief of royalty method, and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions. The key assumptions of the cost approach include replacement cost, functional and economic obsolescence, and remaining useful life.
The estimated values of the assets acquired and liabilities assumed will remain preliminary for a period of time after the Closing until WBD determines the fair values of the assets acquired and liabilities assumed. The final determination of the purchase price allocation will be completed as soon as practicable after the completion of the Merger and will be based on the fair values of the assets acquired and liabilities assumed as of the Closing Date. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented in the unaudited pro forma condensed combined financial statements.
17
The following table summarizes the allocation of the preliminary purchase price as of December 31, 2021 (in millions):
| Historical WarnerMedia Business after Reclassification Adjustments (Note 2) |
Pre-Merger Adjustments (Note 3) |
Merger Adjustments |
Fair value | |||||||||||||||||
| Purchase consideration |
$ | 42,365 | ||||||||||||||||||
| Identifiable net assets: |
||||||||||||||||||||
| Affiliate and subscriber relationships |
$ | 11,942 | $ | — | $ | 7,558 | (a) | $ | 19,500 | |||||||||||
| Trade names |
16,688 | — | 5,671 | (a) | 22,359 | |||||||||||||||
| Other intangible assets |
7,682 | — | 5,978 | (a) | 13,660 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Intangible assets, net |
36,312 | — | 19,207 | 55,519 | ||||||||||||||||
| Film and television library |
18,940 | — | (87 | ) | (b) | 18,853 | ||||||||||||||
| Film and television library – fair value adjustment |
3,961 | — | 1,461 | (a) | 5,422 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Film and television library, net |
22,901 | — | 1,374 | 24,275 | ||||||||||||||||
| Property and equipment, net |
4,238 | — | (121 | ) | (c) | 4,117 | ||||||||||||||
| All other assets (excluding goodwill) |
14,698 | 1,093 | (324 | ) | (d) | 15,467 | ||||||||||||||
| Long-term debt |
(1,713 | ) | (39,796 | ) | (356 | ) | (e) | (41,865 | ) | |||||||||||
| Deferred income taxes |
(11,361 | ) | — | (4,961 | ) | (f) | (16,322 | ) | ||||||||||||
| All other liabilities |
(19,493 | ) | — | (25 | ) | (g) | (19,518 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total identifiable net assets |
45,582 | (38,703 | ) | 14,794 | 21,673 | |||||||||||||||
| Goodwill |
39,692 | — | (19,000 | ) | (h) | 20,692 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | 85,274 | $ | (38,703 | ) | $ | (4,206 | ) | $ | 42,365 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| a) | Fair value adjustments as part of preliminary valuation analysis. |
| b) | As discussed in Note 6(b), an adjustment of $(104) million was included in Film and television library to eliminate noncurrent content rights related to the WarnerMedia Business’s licensing of certain content and programming to WBD. An adjustment of $17 million represents the book value of noncurrent sports rights, which is fair valued and recorded as part of Film and television library. |
| c) | The adjustment of $(121) million to Property and equipment, net represents the removal of the book value of developed technology, which is fair valued and recorded as part of Other intangible assets. |
| d) | The adjustment to All other assets primarily represents an adjustment of $285 million for operating lease right-of-use assets based on the remeasurement of operating leases of the WarnerMedia Business (see Note 6(d)), an adjustment of $(571) million to remove the book value of other noncurrent assets, which are fair valued and recorded as part of Other intangible assets, and an adjustment of $(38) million related to Other noncurrent assets. |
| e) | The adjustment to Long-term debt represents the removal of debt issuance costs of $(204) million (see Note 3) and a fair value adjustment of $(152) million related to existing debt of the WarnerMedia Business determined using various methods, including quoted prices for identical or similar securities in both active and inactive markets. |
| f) | The adjustment to Deferred income taxes represents the deferred income tax impact of all merger adjustments. |
| g) | The adjustment to All other liabilities represents an adjustment to Accounts payable and accrued liabilities of $(3) million and Other noncurrent liabilities of $(22) million to reflect the remeasurement of operating leases of the WarnerMedia Business. Refer to Note 6(d) for additional discussion on the adjustment to operating lease liabilities. |
| h) | The unaudited pro forma condensed combined balance sheet has been adjusted to reflect the elimination of the WarnerMedia Business’s historical goodwill of $39,692 million and to record goodwill resulting from the Transactions of $20,692 million. Goodwill is calculated as the difference between the fair value of the purchase price paid and the preliminary values assigned to the identifiable tangible and intangible assets acquired and liabilities assumed. |
Net assets acquired include the debt incurred by the WarnerMedia Business to pay the Special Cash Payment to AT&T and existing noncurrent debt of the WarnerMedia Business. See Note 3 for further details. The unaudited pro forma condensed combined statement of operations has also been adjusted to reduce interest expense of $15 million for the year ended December 31, 2021 related to the fair value adjustment for noncurrent portion of debt.
18
As part of the preliminary valuation analysis, WBD identified finite trade names, affiliate and subscriber relationships, film and television library and other intangible assets. The final fair value determinations for identifiable intangible assets may differ from this preliminary determination, and such differences could be material. The remaining useful life of the acquired intangible assets was estimated based on a preliminary estimate of the period over which substantially all of the cumulative discounted cash flows are expected to be realized. The pro forma adjustment to recognize additional expense related to the increased carrying value of the intangible assets has been computed with the assumption that these will be amortized over the estimated useful lives on a straight-line basis, the revenue forecast model or sum of the years’ digits method, as WBD management continues to evaluate the pattern of the economic benefits.
The following table summarizes the estimated fair values of the WarnerMedia Business’s identifiable assets (in millions):
| Financial Statement |
Estimated Fair Value |
Estimated Weighted | ||||||
| Film and television library |
Film and television library, net | $ | 18,853 | Revenue Model | ||||
| Fair value adjustment - Film and television library |
Film and television library, net | 5,422 | Revenue Model | |||||
| Affiliate and subscriber relationships (1) |
Intangible assets, net | 19,500 | 7 | |||||
| Trade names |
Intangible assets, net | 22,359 | 14 - 35 | |||||
| Other intangible assets (1) |
Intangible assets, net | 13,660 | 2 - 35 | |||||
|
|
|
|||||||
| $ | 79,794 | |||||||
|
|
|
|||||||
| (1) | Affiliate and subscriber relationships and Advertising relationships, which are included within Other intangible assets, are amortized using an accelerated method (sum of the years’ digits) to reflect the pattern of benefit and period of time over which the relationships are expected to generate cash flows. |
Based on WBD’s accounting policy, content assets and noncurrent content rights, including historic fair market value adjustments from prior acquisitions, are included within Film and television library, net, with any related amortization of film and television library included in cost of revenues. The pro forma adjustment to cost of revenues reflects the incremental content amortization expense resulting from fair value adjustments to film and television library and other noncurrent assets, in addition to conforming accounting policies to present cost of revenues consistent with WBD’s accounting policy. The following table summarizes the amortization expense recorded to costs of revenues (in millions):
| Year ended December 31, 2021 |
||||
| Film and television library – fair value adjustment |
$ | 1,175 | ||
| Other noncurrent assets (1) |
64 | |||
| Less historical amortization expense included in Costs of revenues (after reclassification adjustments) (2) |
(722 | ) | ||
|
|
|
|||
| Total pro forma adjustment to Costs of revenues |
$ | 517 | ||
|
|
|
|||
| (1) | Other noncurrent assets included a fair value adjustment of $128 million related to video game costs. The estimated weighted average useful life was 2 years. |
| (2) | The WarnerMedia Business’s historical released television and film content acquired in a business combination included in cost of revenues (after reclassifications) was $722 million for the year ended December 31, 2021. The historical amounts in cost of revenues included $699 million of content amortization expense from adjustment 26 in Note 2, and $23 million of video game costs amortization historically recorded in cost of revenues. |
The pro forma adjustment to depreciation and amortization expense reflects the incremental amortization expense from the acquired affiliate and subscriber relationships, trade names, and other intangible assets. The following table summarizes the amortization expense recorded to depreciation and amortization (in millions):
19
| Year ended December 31, 2021 |
||||
| Affiliate and subscriber relationships |
$ | 4,875 | ||
| Trade names |
696 | |||
| Other intangible assets |
1,481 | |||
| Less historical amortization expense included in Depreciation and amortization (after reclassification adjustments) (3) |
(3,278 | ) | ||
|
|
|
|||
| Total pro forma adjustment to Depreciation and amortization |
$ | 3,774 | ||
|
|
|
|||
| (3) | The WarnerMedia Business’s historical depreciation and amortization expense (after reclassifications) was $3,852 million for the year ended December 31, 2021, which included historical amortization related to intangible assets of $3,278 million. |
A 10% change in the valuation of intangible assets would cause a corresponding increase or decrease in expense of approximately $829 million for the year ended December 31, 2021 based on the estimated useful lives used above.
The estimated tax impact of the fair market value adjustments on the amortization expense is reflected in the unaudited pro forma condensed combined statement of operations using the blended foreign, federal and state statutory tax rate of the jurisdictions expected to be impacted. The actual deferred tax assets and liabilities may differ materially based on changes resulting from finalizing the allocation of the purchase price and valuing the assets acquired and liabilities assumed that are not reasonably estimable for the purposes of these unaudited pro forma condensed combined financial statements. The estimated tax impact of the fair market value adjustments on the costs of revenues and depreciation and amortization expense is reflected in the unaudited pro forma condensed combined statement of operations using the weighted average rate of 25.0% which was based on the blended statutory tax rates of the jurisdictions expected to be impacted for the periods presented.
Note 6—Pro Forma Adjustments
Pro Forma Adjustments – Condensed Combined Balance Sheet as of December 31, 2021:
| a) | The unaudited pro forma condensed combined balance sheet has been adjusted to reflect an adjustment for future estimated transaction related costs consisting of financial advisory, professional, legal and other acquisition-related fees. The transaction costs that were incurred by Discovery through the Closing Date amounted to $140 million and are adjusted in the unaudited pro forma condensed combined balance sheet as an increase to Accounts payable and accrued liabilities and a decrease to Retained earnings. |
| b) | This adjustment eliminates intercompany receivables and payables between WBD and the WarnerMedia Business. |
| (in millions) | As of December 31, 2021 |
|||
| Receivables, net |
$ | (37 | ) | |
| Accounts payable and accrued liabilities |
(34 | ) | ||
| Deferred revenues |
(3 | ) | ||
In addition, an adjustment of $104 million was recorded to eliminate noncurrent content rights related to the WarnerMedia Business’s licensing of certain content and programming to WBD. This adjustment for intercompany activity was reflected in the Merger adjustments column in Note 5(b).
| c) | The estimated tax impacts of the pro forma adjustments have been reflected in Deferred income taxes in the unaudited pro forma condensed combined balance sheet by using a tax rate of 25.0 %, unless otherwise stated. This tax rate was determined using the blended foreign, federal and state statutory tax rate of the jurisdictions expected to be impacted for the period presented. The total effective tax rate of WBD could be significantly different depending on the post-acquisition geographical mix of taxable income and other factors. Because the tax rate used for these unaudited pro forma condensed combined financial statements is an estimate, it will likely vary from the actual rate in periods subsequent to the completion of the Transactions and those differences may be material. |
20
The pro forma adjustment to Deferred income taxes of $4,961 million reflects the aggregate pro forma income tax effects of the step-up in fair value of identifiable assets as part of purchase price accounting reflected in the unaudited pro forma condensed combined balance sheet.
| d) | This adjustment remeasures the acquired operating leases of the WarnerMedia Business using WBD’s incremental borrowing rate for its operating leases as required by ASC 842. An incremental borrowing rate for operating leases of 3.57% was used in this calculation, which reflects WBD’s weighted average incremental borrowing rate for operating leases. This adjustment was reflected in the purchase price allocation in Note 5(d) within the All other assets (excluding goodwill) line item and Note 5(g) within the All other liabilities line item. The financial statement captions for this pro forma adjustment were included below. |
| (in millions) | As of December 31, 2021 |
|||
| Adjustment to Other noncurrent assets |
$ | 285 | ||
| Adjustment to Accounts payable and accrued liabilities |
3 | |||
| Adjustment to Other noncurrent liabilities |
22 | |||
| e) | This adjustment to Accounts payable and accrued liabilities of $155 million is to record the impact of WarnerMedia Business non-recurring retention bonuses, performance bonuses, and current portion of severance directly attributable to the Transactions and the corresponding adjustment to Retained earnings for amounts accrued as of the Closing Date. |
| f) | This adjustment to Other noncurrent liabilities of $23 million is to record the impact of WarnerMedia Business non-current portion of severance in connection with the termination of certain executive officers of the WarnerMedia Business and the corresponding adjustment to Retained earnings for amounts accrued as of the Closing Date. |
| g) | This adjustment to Retained earnings and Additional paid-in capital of $23 million represents the accelerated vesting of the 70% of Mr. Zaslav’s unvested Discovery stock options (“Discovery Options”) granted under his prior employment agreement (the “Prior Employment Agreement”). 70% of Mr. Zaslav’s Discovery Options vested upon the Closing, and the remaining 30% of such Discovery Options remain outstanding and will continue to vest as provided in the Prior Employment Agreement. Mr. Zaslav was also granted Discovery stock appreciation rights (“Discovery SARs”) and Discovery performance restricted stock units (“PRSUs”) under his Prior Employment Agreement, which were both fully expensed by Discovery as of December 31, 2021. Mr. Zaslav’s Discovery SARs and Discovery PRSUs, each granted under the Prior Employment Agreement, became vested (and no longer subject to acceleration upon the Closing) on January 2, 2022 and February 28, 2022, respectively. |
| h) | This adjustment to Retained earnings and Additional paid-in capital of $789 million reflects the effect of transaction expenses incurred in connection with Advance/Newhouse Programming Partnership and Advance/Newhouse Partnership (together, “Advance/Newhouse”), as further discussed in Note 6(j). |
| i) | On April 7, 2022, Turner Broadcasting System, Inc., a former subsidiary of AT&T (“Turner”), as servicer, and AT&T Receivables Funding II, LLC, a former subsidiary of AT&T (the “Receivables Seller”), as seller, entered into a second amended and restated receivables purchase agreement, dated as of April 7, 2022 (the “RPA”), with PNC Bank, National Association (“PNC”), as administrative agent and as purchaser, and the other parties thereto, pursuant to which the Receivables Seller sold and transferred, and will continue to sell and transfer, certain receivables to PNC, as purchaser, and to other purchasers under the RPA. The RPA has a facility limit of $6.0 billion. On April 7, 2022, Discovery entered into a performance guaranty (the “Performance Guaranty”) in favor of PNC, as administrative agent under the RPA, pursuant to which Discovery provided, on and from the Closing Date, a performance guarantee of certain obligations of Turner, as servicer and originator, and certain other subsidiaries of Discovery, as originators. |
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On the Closing Date, PNC, as administrative agent, released liens over certain of AT&T’s mobility receivables, and AT&T was released (and Discovery was substituted) as performance guarantor. In addition, on the Closing Date, approximately $1,287 million of funds of Discovery and its affiliates were contributed to the Receivables Seller to be held in certain pledged accounts of the Receivables Seller with PNC and/or its affiliates as replacement collateral for the Receivables Seller’s obligations under the RPA. A pro forma adjustment of $1,287 million was recorded to reclassify funds transferred into an escrow account as restricted cash, which is included within Prepaid expenses and other current assets.
Pro Forma Adjustments – Combined Statement of Operations for the year ended December 31, 2021:
| j) | Pro forma adjustments related to transaction costs were $999 million for the year ended December 31, 2021 and were recorded to Selling general and administrative expense. |
Discovery incurred $65 million of transaction related costs during the year ended December 31, 2021. The WarnerMedia Business incurred $107 million of transaction related costs during the year ended December 31, 2021. These transaction-related costs are included in the unaudited pro forma condensed combined statement of operations. The anticipated transaction costs that are expected to be incurred by Discovery and AT&T related to the Transactions amount to $140 million and $70 million, respectively. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2021 has been adjusted to reflect the additional anticipated transaction costs and related tax impact. These costs are not expected to affect the statement of operations beyond 12 months after the Closing Date.
The Transactions closed on April 8, 2022, after approval by Discovery stockholders, which was received on March 11, 2022, and after the satisfaction of customary closing conditions, including receipt of regulatory approvals. The Transactions required, among other things, the affirmative vote or written consent of Advance/Newhouse pursuant to the Certificate of Designation of Series A-1 Convertible Participating Preferred Stock of Discovery for any Special A-1 Class Vote Matter (as such term is defined therein) as the holder of all of the outstanding shares of Discovery Series A-1 preferred stock. Pursuant to a consent agreement with Discovery (the “Consent Agreement”), Advance/Newhouse delivered an irrevocable written consent to Discovery consenting to, approving and adopting the Merger Agreement and any actions required thereby. In connection with Advance/Newhouse’s entry into the Consent Agreement and related forfeiture of the significant rights attached to the Discovery Series A-1 preferred stock in the Reclassification, Advance/Newhouse received an increase to the number of shares of WBD common stock into which the Discovery Series A-1 preferred stock were converted. Upon the Closing, the impact of such additional shares of WBD common stock was recorded as a transaction expense. In the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2021, this amount was $789 million. No vote by AT&T stockholders was required for the completion of the Transactions.
This transaction cost of $789 million was computed using the closing price per share of Discovery Series A common stock reported on Nasdaq on April 8, 2022, the Closing Date, and has been reflected as a transaction cost classified within Selling, general and administrative expense in the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2021. These costs are not expected to affect the statement of operations beyond 12 months after the Closing Date. This transaction cost of $789 million is part of the share-for-share exchange and thus qualifies for non-recognition (and non-deduction) treatment for tax purposes. Accordingly, no tax impact for this pro forma adjustment has been reflected in income tax (expense) benefit within the unaudited pro forma condensed combined statement of operations.
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| k) | Pro forma adjustments related to incremental employee costs were $245 million for the year ended December 31, 2021 and were recorded to Selling general and administrative expense. |
Unvested share-based awards of the WarnerMedia Business granted prior to May 17, 2021 were replaced with unvested share-based awards of WBD, under similar terms, as of the Closing Date, pursuant to an employee matters agreement, dated as of May 17, 2021 (“the Employee Matters Agreement”), by and among Discovery, Spinco and AT&T. The portion of the value of the unvested replacement awards proportionate to the service already rendered has been recognized as part of the preliminary purchase consideration; see Note 4 for further details. The remainder portion of the value of the unvested replacement awards will be recognized as additional stock-based compensation expense within Selling, general, and administrative expense. As the amount recorded in the historical period is greater than the expense associated with the new Employee Matters Agreement, no incremental pro forma adjustment was recorded for the year ended December 31, 2021. The actual fair value of WBD’s replacement awards may differ materially from the preliminary determination included within the unaudited pro forma condensed combined financial statements.
In connection with the Transactions, Discovery entered into an amended and restated employment agreement on May 16, 2021 (the “Employment Agreement”) with its Chief Executive Officer, David M. Zaslav, which amended and restated Mr. Zaslav’s Prior Employment Agreement. Under the terms of the Employment Agreement, in lieu of accelerated “single-trigger” vesting treatment that would have applied upon a “change in control” to all of his outstanding equity based awards granted under the Prior Employment Agreement, 70% of Mr. Zaslav’s unvested Discovery Options granted under his Prior Employment Agreement “single-trigger” vested upon the Closing (but with the same distribution schedule that applied prior to the Merger) and the remaining 30% of such Discovery Options remain outstanding and will continue to vest as provided in the Prior Employment Agreement. The pro forma adjustment related to Mr. Zaslav’s accelerated vesting was $23 million for the year ended December 31, 2021. This accelerated vesting adjustment is considered a nonrecurring item that is not expected to affect the statement of operations beyond 12 months after the Closing Date. Mr. Zaslav was also granted Discovery SARs and Discovery PRSUs under his Prior Employment Agreement, which were both fully expensed by Discovery as of December 31, 2021. Mr. Zaslav’s Discovery SARs and Discovery PRSUs, each granted under the Prior Employment Agreement, became vested (and no longer subject to acceleration upon the Closing) on January 2, 2022 and February 28, 2022, respectively.
In connection with the execution of the Employment Agreement in 2021, Mr. Zaslav was granted Discovery Options under Discovery’s 2013 Stock Incentive Plan. An additional grant of Discovery Options was delayed under the Employment Agreement and granted on January 3, 2022. Mr. Zaslav will also be granted annual awards of Discovery PRSUs from 2022 to 2027, and the grant of Discovery PRSUs is not expected to result in incremental share-based compensation expense compared to Mr. Zaslav’s Prior Employment Agreement. The pro forma adjustment related to the incremental share-based compensation expense was $14 million for the year ended December 31, 2021.
The WarnerMedia Business recorded $242 million of retention and performance bonuses during the year ended December 31, 2021. The unaudited pro forma condensed combined statement of operations reflects the incremental expense associated with the WarnerMedia Business non-recurring retention and performance bonuses of $208 million for the year ended December 31, 2021 which are directly attributable to the Transactions. These costs are not expected to affect the statement of operations beyond 12 months after the Closing Date.
| l) | This adjustment to Restructuring and other charges of $53 million was recorded for severance in connection with the termination of certain executive officers of the WarnerMedia Business. These costs are not expected to affect the statement of operations beyond 12 months after the Closing Date. |
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| m) | This adjustment eliminates intercompany revenue and expenses between WBD and the WarnerMedia Business, which primarily relates to the WarnerMedia Business’s licensing of certain content and programming to WBD and advertising revenue between WBD and the WarnerMedia Business. |
| (in millions) | Year ended December 31, 2021 |
|||
| Adjustment to Content revenue |
$ | (112 | ) | |
| Adjustment to Advertising revenue |
(18 | ) | ||
| Adjustment to Costs of revenues, excluding depreciation and amortization |
(112 | ) | ||
| Adjustment to Selling, general and administrative expense |
(18 | ) | ||
| n) | The estimated tax impacts of the pro forma adjustments have been reflected in Income tax (expense) benefit within the unaudited pro forma condensed combined statement of operations by using a blended foreign, federal and state statutory income tax rate of 25.0%. Refer to Note 6(j) for discussion on the pro forma adjustment of $789 million related to transaction costs for the year ended December 31, 2021 incurred in connection with the additional shares of WBD common stock that were received by Advance/Newhouse, which is part of the share-for-share exchange and thus qualifies for non-recognition (and non-deduction) treatment for tax purposes. The effective tax rate of WBD could be significantly different than what is presented in these unaudited pro forma condensed combined financial statements depending on post-acquisition activities, including legal entity restructuring, repatriation decisions, and the geographical mix of taxable income. |
Note 7—Pro Forma Net Loss Per Share
The pro forma net loss per share of WBD common stock for the year ended December 31, 2021 was calculated based on the estimated weighted average number of shares of WBD common stock that would have been outstanding on a pro forma basis. The pro forma weighted average number of shares outstanding was derived using Discovery’s historical weighted average number of shares outstanding after giving effect to (1) the reclassification and conversion of Discovery’s convertible preferred stock, and (2) the number of shares of WBD common stock to be issued as part of purchase consideration calculated pursuant to the Merger Agreement. For the purposes of the pro forma net loss per share calculations, the reclassification and conversion of Discovery’s convertible preferred stock were considered to occur as of January 1, 2021. The number of shares of WBD common stock issued in connection with the Merger was calculated as of January 1, 2021. Per share information for the WarnerMedia Business is not presented because the WarnerMedia Business did not have outstanding capital stock since its historical combined financial statements have been prepared on a “carve-out” basis.
The following table presents the calculation of pro forma basic and diluted net loss per share of WBD common stock (in millions, except per share amounts):
| Year ended December 31, 2021 |
||||
| Pro forma net loss attributable to WBD common stockholders |
$ | (3,292 | ) | |
| Weighted average number of shares outstanding of Discovery, Inc. Series A, B, C common stock – basic |
503 | |||
| Reclassification and conversion of Discovery, Inc.’s convertible preferred stock |
187 | |||
| WBD common stock issued as part of purchase consideration (Note 4) |
1,732 | |||
|
|
|
|||
| Pro forma weighted average number of shares outstanding of WBD common stock – basic and diluted |
2,422 | |||
| Pro forma net loss per share of WBD common stock – basic and diluted |
$ | (1.36 | ) | |
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