Hello, and welcome back to Dry Powder.

Thanks for being a part of Puck, our new media company covering the intersection of Wall Street, Washington, Silicon Valley, and Hollywood. 

In today's email: John Malone, David Zaslav, John Stankey, and why Steven Newhouse may be the true shareholder power behind the scenes of the soon-to-be Warner Bros. Discovery combination.

The Secret Power Behind Zazworld

It’s the Newhouses, not John Malone, who will have the leverage to help Zaslav steer the soon-to-be Warner Bros. Discovery toward streaming glory.

The conventional wisdom has it that John Malone—or Dr. John Malone as he is referred to in public securities filings, presumably because of his Ph.D. in operations research from Johns Hopkins University—is the power behind David Zaslav’s throne, and that Malone will be the man pulling Zaslav’s strings as he prepares to take control of Hollywood’s latest flashy toy, Warner Bros. Discovery. And that might make some sense, at least in a New York-L.A. parlor game sort of way. 

Malone, a multi-billionaire, was one of the pioneers in the cable industry and he remains a powerhouse through his various Liberty Media entities. He and Zaslav have been friends for decades, dating back to when Zaslav was an executive at GE, which then owned NBC, and he and Tom Rogers and Bob Wright and Jack Welch wanted to create what became CNBC. Zaslav’s first stop back then was to see Malone, in Colorado, to get his support for the new channel and to make sure that Ted Turner and CNN—Malone was a big backer of Turner and his cable news creation—had no intention of creating a competing business network. (He didn’t.) And, of course, Malone is also a member of Zaslav’s board of directors at Discovery and one of that company’s largest shareholders, with an economic stake equal to around 1 percent and a voting stake equal to around 20 percent. He has been an important mentor to Zaslav over the years, and one of his most enthusiastic backers.

But when the Warner Bros. Discovery deal is done and dusted, perhaps as soon as April, it will actually be Steven Newhouse, not Malone, who will be the biggest shareholder in Zaslav’s new company. Newhouse, now 65 years old, is the low-key and affable chairman of Advance Communications, best known for its ownership of Conde Nast—the publisher of The New Yorker, Vogue, and Vanity Fair (where I was a special correspondent for 13 years), among other publications. Advance also owns the company that sponsors the Ironman competitions and holds a majority stake in Reddit, the powerful online message board. But the bulk of the Newhouse family’s wealth, estimated by Bloomberg at around $19 billion these days, comes from its ownership stakes in cable companies, specifically Discovery and Charter Communications, in which it has a roughly 13 percent stake worth around $13.3 billion. 

According to Discovery’s recently filed proxy statement related to the Warner Bros. Discovery deal, the Newhouses will own nearly 200 million shares of Warner Bros. Discovery, or 8.3 percent of the company’s 2.4 billion shares outstanding, making them the largest shareholders in the company. The two next largest shareholders of Warner Bros. Discovery are slated to be the massive asset-management companies, The Vanguard Group, with a 7.8 percent ownership stake, and BlackRock, Inc., with a 6.8 percent ownership stake. Both Vanguard and BlackRock were big AT&T shareholders and also owned a smaller amount of shares in Discovery before the announcement of the combination. It’s important to note that by the terms of the agreement, AT&T shareholders will own 71 percent of Warner Bros. Discovery and Discovery’s shareholders will own the remaining 29 percent. In other words, the Discovery shareholders stake in the new company has been meaningfully diluted down as part of the deal, but not in a bad way. (Better, I guess, to be a smaller fish in a bigger pond.) For his part, according to the proxy, Malone will have an ownership stake in Warner Bros. Discovery below 1 percent.  

The Newhouses will also be relative powerhouses on the new Warner Bros. Discovery board of directors. The new board will have 13 members, seven appointed by AT&T and six appointed by Discovery Communications. The Newhouses will have two of the 13 seats on the board. Steven Newhouse will have one of those seats and Steven Miron, a senior executive at Advance, will have the other. Both Newhouse and Miron are designated as “Class III” directors on the new board, meaning they will serve for three years after the deal closes, and then will be up for re-election on an annual basis thereafter. Malone is also one of Zaslav’s appointees to the board. He is a “Class II” board member, meaning he will serve for two years, and then will be up for re-election on an annual basis thereafter. 

The other Discovery appointees to the new board will be Zaslav, of course, as well as Robert Bennett, a longtime Discovery board member and one of the founding executives of Malone’s cable empire, and Paul Gould, a managing director of Allen & Co. the boutique investment bank, which advised Zaslav on the deal, although not Gould, who was on the Discovery board. AT&T has yet to designate its seven board members to the new Warner Bros. Discovery board, but it will be the one to appoint the board chairman.

Indeed, it is likely to be the Newhouses, not Malone, who are the muscle behind Warner Bros. Discovery. Their leverage was apparent as the deal was coming together. According to the proxy statement, almost exactly one year ago—on March 2, 2021—Zaslav and John Stankey, the C.E.O. of  AT&T, met in person to continue a conversation about the possible deal that had started in earnest on February 13. In addition to meeting with Stankey, Zaslav called Newhouse representatives to see if they would relinquish the “special rights” the family had given its ownership of a preferred stock in Discovery, essentially a provision giving the Newhouses veto power over any deal greater than $250 million. 

As the company's largest shareholder, the Newhouses had some serious leverage to block the blockbuster, if they chose to do so. On April 29, after months of negotiation, Stankey and Zaslav agreed to a term sheet for the deal that would give AT&T shareholders 71 percent of Warner Bros. Discovery and allowed AT&T to transfer $43 billion of its debt onto the WarnerMedia assets. The next day, according to the proxy, the Newhouses conveyed to Zaslav that they would need to be “appropriately compensated” before relinquishing their “special rights.” As a precondition of a deal, after all, the “special rights” lever was worth something—a lot of somethings, actually. And the Newhouses weren’t going to give up those rights without a return on their investment. On May 12, the Discovery board discussed the need to appoint a special independent committee to work with the Newhouses and win their blessing for the merger. Without the support of the Newhouses, according to the proxy, there would be no deal.

Later that day, with Robert Bennett as chairman, the independent committee had its first meeting and decided to retain Wachtel Lipton, as legal advisor, and Perella Weinberg Partners as its financial advisor. The committee had to act quickly. Zaslav and Stankey wanted to announce the deal on Monday, May 17, and the leaks to the press about it had already started. The various advisors kicked into high gear, with Paul Weiss communicating on behalf of the Newhouses with Wachtel and RBC Capital Markets, also on behalf of the Newhouses, interacting with Perella Weinberg. 

According to the proxy, the Newhouses initially requested compensation in excess of $2 billion, in the form of additional shares in the Warner Bros. Discovery, to support the deal and to give up their “special rights,” as well as three seats on the new board of the directors. Outlandish opening gambits are standard practice on Wall Street, especially when you have what other people want or need to accomplish something bigger. It was the job of the independent committee and its legal and financial advisers to manage the negotiations with Newhouses by lowering their ask while also making them feel very well compensated for their troubles. And that is, of course, what happened. 

In the end, on the afternoon of May 16, in exchange for their support of the deal, the Newhouses agreed to get some $787 million worth of additional shares in the new company, beyond what the straight math would have dictated, plus two board seats. The independent committee and its advisors had done their job. Whereas based on straight math, the Newhouses would have been entitled to around 6.7 percent of the ownership of Warner Bros. Discovery, their leverage gave them 8.3 percent of the company, a sweetener of 24 percent. That same day, the Discovery board of directors approved the side deal with the Newhouses—pretty much the final impediment to completing the big deal with AT&T, which was announced the following morning.

It was yet another example of one of my favorite Wall Street aphorisms, this one from Gus Levy—the former senior partner of Goldman Sachs back in the day—that “something well bought is half sold.” In other words, if you demand, and get, something like a special veto provision as part of your initial investment in a company, it may turn out to be worth something like three-quarters of a billion dollars one day. 

Based on my reading of the proxy materials and numerous conversations with people in and around this fascinating deal, the time has come to put to bed the assertion that Malone will be calling the shots at Warner Bros. Discovery or that he had a hand in the sudden firing of Jeff Zucker, from CNN, last week (as has been much rumored) or that he’ll be setting the editorial policy at CNN, as he blurted out during a November interview on CNBC. I am told that it’s “delusional” and “beyond absurd” to think that Malone had a role in the Zucker mess or that Malone would have anything to do with the editorial content at Warner Bros. Discovery. Sure, he’s been an important mentor to Zaslav for a long time and he has a seat on the board of directors. He’ll continue to be an influential voice. But with a less than 1 percent stake in the company, Malone’s economic interests lay elsewhere. The same cannot be said of the Newhouses. 

And one other side note of interest: As a former Wall Street banker, I can’t resist trying to tally up the fees the bankers will get once the deal closes. According to the proxy, Allen & Co. will get $75 million for its work advising Discovery (although the proxy makes clear that none of that fee will go to Paul Gould, the Allen & Co. banker who is on the Discovery board and who will be on the board of Warner Bros. Discovery.) JPMorgan Chase, which came into the process much later and, like Allen & Co., also provided a fairness opinion to the Discovery board, will get a fee of $15 million for its advice and another $140 million of fees related to the financing it is providing for the deal. AT&T’s advisers Lion Tree and Goldman Sachs, are estimated to be receiving $47.8 million and $43.1 million respectively. 

The proxy does not share the information on how much Perella Weinberg got paid for its week or so of work negotiating with the Newhouses for their payoff. Nor does it disclose what the flotilla of lawyers, including Sullivan & Cromwell, Debevoise & Plimpton and Paul Weiss, will get for its hours and hours of billable service. But you can rest assured it’s a bundle.

FOUR STORIES WE'RE TALKING ABOUT