Image Credit: Flickr user Mike Mozart // CC 2.0 License

A brand new entertainment powerhouse is on the cards, built as the result of an alliance between AT&T, owner of some of Hollywood’s most powerful studios and home to successful franchises like Harry Potter and Batman, and Discovery, the owner of lifestyle TV networks such as HGTV and TLC and the producer of unscripted home, cooking and nature and science shows.

AT&T said that it would be spinning off its WarnerMedia unit and combining it with Discovery, merging assets ranging from CNN and HBO to HGTV and the Food Network to create an entity that will be valued at about $120 billion including debt, based on WarnerMedia’s estimated enterprise value of more than $90 billion.

Shares in Discovery climbed about 16% to $41.3 in premarket trade but later fell by 2%, shares while AT&T rose about 3% to $33.23 after the announcement.

AT&T, which owns HBO and Warner Studios, said that Discovery Chief Executive David Zaslav will lead the new entity, which will be a standalone global entertainment and media business.

According to the deal, AT&T will receive $43 billion in cash, debt securities, and debt retention, while its shareholders will take stock representing 71% of the new company, with owners of Discovery holding 29%. The deal is structured as a tax-friendly Reverse Morris Trust. AT&T said it will use the $43 billion proceeds from the tax-free spin-off of its media assets to pay down its more than $160 billion of debt. It added that it had plans to cut its dividend payout ratio to the low 40% range, down from around 60% in the previous quarter.

“This agreement unites two entertainment leaders with complementary content strengths and positions the new company to be one of the leading global direct-to-consumer streaming platforms,” AT&T CEO John Stankey.

“It will support the fantastic growth and international launch of HBO Max with Discovery’s global footprint and create efficiencies which can be re-invested in producing more great content to give consumers what they want.”

The new company, whose name be disclosed by next week, will be a powerhouse that is expected to provide stiff competition to Netflix and Disney, which are already leaders in the streaming service market. It is set to be a combination of Discovery’s reality-TV empire and AT&T’s vast media holdings, merging HBO and its “Games of Thrones” franchise, the “Batman” films, and TV channels such as Discovery, Cartoon Network, HGTV, TNT, TBS, and Eurosport, along with Discovery’s Discovery Channel, Food Network, Animal Planet, and others.

“I expect AT&T is going to be the No. 1 telecom and communications company in the world,” Zaslav said on the conference call. And the new combined entity “will not stop until we have the No. 1 global entertainment company, reaching people on every device.”

This move effectively marks the end of AT&T’s attempts of becoming a media behemoth, along with being a telecom giant that it has been. And to pursue that goal, the company had major moves, acquiring satellite TV service DirecTV for $68 billion in 2015 and Time Warner in 2018 for $108.7 billion.