AT&T, Warner Bros. Discovery deal gives investors plot twists

Primetime TV came early – really early – Monday morning for investors, when the big movie deal between Discovery and AT&T (T) was closed, clearing the picture for the new Warner Bros. Discovery (WBD).

Judging by the market’s reaction, the trade received high ratings for each company, with shareholders already set on getting a nice boost. Although stock trends split slightly on Tuesday, the mood is generally positive.

“These media conglomerate merger agreements are strategic for more diverse content. This is in line with Disney’s (DIS) acquisition of Fox (FOXA) a few years ago, which achieved a more diversified portfolio of content and facilitated the launch of Disney +,” told Kira Baca, Chief Revenue Officer at IP rights firm Rightsline Real money. “With the merger of Discovery, which is strong in documentary film, lifestyle and do-it-yourself brand without script, and WarnerMedia’s scripted features and episodic brands and channels, they have the opportunity to conquer a combined market to compete with all competitors. “

But she noted that “the devil is in the data” for investors who now have both firms, as details of integration remain open to debate.

Details of the agreement

AT&T received $ 40.4 billion in cash and relieved part of the debt, while it recently renamed Warner Bros. Discovery received a wealth of programming to add to their streaming and cable offerings.

“Today’s announcement marks an exciting milestone not only for Warner Bros. Discovery, but for our shareholders, our distributors, our advertisers, our creative partners and, most importantly, consumers globally,” proclaimed David Zaslav, CEO of the new company at the closure. . “With our collective assets and diversified business model, Warner Bros. Discovery offers the most differentiated and complete portfolio of content across movies, TV and streaming.”

Included in this highly acclaimed portfolio are streaming offers from HBO Max, Discovery + and CNN +; and cable channels like TNT, TBS, TLC, truTV, Animal Planet, Cartoon Network and more. The acquisition undoubtedly places the new company to compete among established streaming executives such as Netflix (NFLX), Apple (AAPL) and Amazon (AMZN).

Shareholders in AT&T also received approximately one-quarter of one share of WBD for each share of AT&T they owned prior to the transaction. As such, former AT&T shareholders now own a majority of the outstanding shares in the new entity. Both shareholders in Discovery and AT&T should examine the newly formed company carefully.

Digging into the new discovery

The rationale for Discovery is straightforward. The content is king, and the deal ensures a massive catalog of shows and movies for the company.

Most importantly, it secures HBO Max for the company, which is currently among the most popular entertainment offerings and is known for delivering premium shows and movies. HBO Max ended 2021 with a total of 73.8 million global subscribers, more than tripling the existing base of Discovery + users. As such, the new company will woo over 100 million streaming subscribers globally.

“As a combined company, Warner Bros. Discovery is rich in content and has plenty of assets for streaming,” said Navdeep Saini, CEO of media technology company DistroTV Real money. “WBD is good for (streaming video on demand) SVOD, but what the company lacks is a (free advertising-supported streaming TV) FAST platform. If the latest reports from Nielsen are any indication, FAST is the way forward in a highly competitive streaming industry, it is reaching its turning point. “

He added that from this point of view, the combination and clearer focus on FAST programming will be a big boost for the company.

However, not all assessments are so rosy.

“There’s a conventional wisdom that ‘bigger is better’ and the combined company will have a lot of power when it comes to things like transport agreements for its linear network,” said Rick Ellis, founder of media analytics firm AllYourScreens. Real money. “But it will be challenging to combine the two companies’ streaming companies, especially considering that their streaming companies look very different internationally.”

He added that the integration risk has also increased due to management changes that remain somewhat uncertain. It only increases the debt burden for the newly formed company that will compete with peers with deep pockets.

The agreement contains clauses that leave the new company on the hook for significant amounts AT & T’s significant debt, which is accrued by merged agreements DirecTV in 2015 and Time Warner.

“We expect the increased debt burden and uncertainty around strategic key issues to be an overhang for equities,” MoffettNathanson analyst Michael Nathanson commented in a note to clients. “Additionally, we are concerned about the additional pressure on WBD from AT & T’s shareholder base, which is likely to sell the 71 percent of the shares due to a different investment profile.”

While his “neutral” rating breaks with the overall bullish sentiment on Wall Street, it is a worthy spruce of salt to digest for investors in every business.

Tightening focus at AT&T

The questions to the AT&T shareholders are twofold, both about the new company and with regard to the now less indebted AT&T.

For the former, debt and the ability to compete with established streaming giants will obscure decisions. Which will worries about many of their AT&T-holding compatriots on their way to the exit. For the latter, the equation seems more positive.

“From the AT&T side, it would be less of a distraction for the company to lose Warner Bros.,” AllYourScreens’ Ellis said. “Executives never really had control of the TV / streaming business, and CEO John Stankey spent a lot of time wondering about WB management. In many ways, this deal is a best case scenario for AT&T.”

The laser focus on areas of competence was also a clear focus from the management.

“We are at the beginning of a new age of connectivity and today marks the beginning of a new era for AT&T,” said AT & T CEO John Stankey. “With the completion of this transaction, we expect to invest at a record level in our growth areas in 5G and fiber, where we have strong momentum while working to become the best broadband company in the US. At the same time, we will sharpen our focus on shareholder returns. . “

The comment appears positive for investors so far, as equities are accelerating and overall confidence in the company’s ability to invest with a healthier balance sheet and a safer dividend. Analysts also appreciated the stronger focus.

“AT&T, a more communications-focused company, now looks more like Verizon (VZ) than it has done for years after removing the distractions and revenue from a declining satellite video business and the Warner / HBO media companies’ capital commitments,” JPMorgan analyst. Phil Cusack wrote in a note that he upgraded the stock after the deal was terminated.

Ultimately, the bullish sentiment abounds with each of them as the deal finally comes through. But judging by the number of remaining question marks, a healthier AT&T is the more attractive option of the two.

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