It’s official. On Monday, Warner Bros. begins. Discovery (WBD) to act. AT&T (NYSE: T) shareholders will per. close on April 5 receive 0.241917 shares in WBD for each share in AT&T held. They will own 71% of the combined company, and AT&T will also receive $ 40.4 billion in cash on top of WBD’s ownership of certain types of debt.
The transaction is a semi-complex transaction, but from a shareholder perspective it boils down to a few key details.
AT&T TimeWarner Transaction – AT&T Discovery Investor Presentation
The Reverse Morris Trust transaction broke out on April 5th. For the week, it traded with a separate T.WI ticker, and on Friday the transaction closed. On Monday, April 11, the new company will begin trading under WBD. The new company will be 29% owned by Discovery shareholders and 71% owned by AT&T shareholders.
AT&T will receive $ 43 billion through a variety of factors, which will be combined with the acceptance of $ 15 billion Discovery debt. Putting it together means $ 58 billion in total debt for the company. The current value that the market places on each stock is $ 24.14 / share, implying a market value of around $ 58 billion.
Asset portfolio and synergies
The combined company has an impressive portfolio and will have the ability to achieve strong synergies.
AT&T Asset Portfolio – AT&T Discovery Investor Presentation
The combined company will be available worldwide with a massive 200,000 hours of video content. The company will have one of the largest TV studios and film studios and will be really competitive with only Disney (DIS) given the huge size. The company has premium sports rights and several impressive assets.
These assets can create significant synergies. Expected cost savings are expected to be more than $ 3 billion annually, which would be a significant portion of the combined company’s earnings. This unique asset portfolio and synergies are the product of decades of content creation, an asset that is almost impossible to copy.
And because of these assets, we expect that there will be significant interest in potentially acquiring WBD. Specifically from large technology companies. As we have discussed before, large technology companies have considered such acquisitions, and we continue to believe that it is a possible
Apple and Amazon are both working hard to build new streaming services. Google does the same via YouTube TV. All of these companies have gained some traction due to their size, but have struggled to achieve significant traction. With Amazon spending $ 13 billion and Apple TV + spending $ 6.5 billion, the cost of failure is not insignificant.
Acquiring TimeWarner would account for 4-6% of the value of these companies, provide non-bat profits and provide them with top-tier streaming services that compete with both Netflix (NFLX) and Disney. TimeWarner alone is already significantly profitable, as we will see in the financial picture below, and it does not count synergies. Therefore, we expect a significant acquisition interest.
The financial picture of the merged company is incredibly strong and will help support increased shareholder rewards.
Combined financial picture – AT&T Discovery Investor presentation
The company as a whole is expected to see revenue grow significantly towards $ 52 billion in 2023E. $ 15 billion of that is expected to come from DTC revenue, and with the company’s HBO Max streaming exceeding the company’s growth expectations, we think it’s likely that the company will be able to get past those numbers.
The company expects adjusted EBITDA to grow from $ 12 billion to $ 14 billion with a 60% FCF conversion and debt going from $ 60 billion to $ 42 billion. This means that the company will primarily focus on repaying debt from 2020 to 2024. This is in line with the company’s long-term leverage targets, which means the potential for significant shareholder returns from 2025 onwards.
At that point, the company will be at $ 14 + billion in adjusted EBITDA and nearly $ 9 + billion of FCF. For a $ 60 billion market value company with $ 40 billion in debt, it’s enough FCF to generate market returns for shareholders, especially with its continued growth. It is an incredibly strong economic picture.
Opportunity for sale
There is potential for an extra opportunity here when WBD starts selling. AT&T investors will own 71% of the combined company, and there is a significant portion who may instead choose to treat it as a dividend of $ 6 per share. share, and sell their new share. Given the significant stock holdings, this could put significant downward pressure on the stock.
The downward pressure, as a potential sales opportunity, may mean that there are more unique opportunities to invest in the coming months. We recommend, for those who want to make a new investment, to opportunistically add stocks as new opportunities present themselves rather than investing at once.
There are two risks to our dissertation.
The first is that streaming is a difficult and capital-intensive market. Lots of new competitors have been added in recent years, and Netflix, for example, has already suffered as a result. There is no guarantee that HBO Max will continue to perform or fail to achieve its peers, and failure to do so may harm the Company’s shareholder rewards.
The second is that the management of Warner Bros. has a history of participating in high acquisitions with cultural clashes and lack of integration. There is no guarantee that the same will not happen with Discovery or a potential future acquirer that harms the company’s ability to continue to provide shareholder returns.
From Monday, Warner Bros. begins. Discovery to act separately. With AT&T shareholders receiving 71% of the combined company, many may rush to sell their investments in the company. In our opinion, we certainly do not recommend selling your investments, and if a divestment occurs, we see it as a unique investment opportunity.
Specifically, the combined company will spend the next two years rapidly reducing its debt burden and taking advantage of synergies before having significant and growing FCF that it can leverage for shareholder rewards. We assess that a combination of dividends and share repurchases together can give the merged companies the opportunity to create double-digit shareholder returns.