Primetime TV came early Monday morning — really early — for investors as the blockbuster deal between Discovery and AT&T(T) closed, clearing the picture for the new Warner Bros. Discovery (WBD) .
Judging by the market’s reaction, the deal received high ratings for each company, with a nice boost for shareholders who were already prepared. Although stock trends split somewhat on Tuesday, overall sentiment remains upbeat.
“These merger agreements between media conglomerates are strategically designed to attract more diverse content. This aligns with Disney’s (DIS) acquisition of Fox (FOXA) a few years ago, which achieved a more diversified portfolio of content and eased the launch of Disney+. Kira Baca, chief revenue officer of IP rights firm Rightsline, told Real Money. “By combining Discovery, which is heavily involved in the unscripted documentaries, lifestyle and DIY brands, and WarnerMedia’s scripted and episode brands and channels they have the opportunity to conquer a common market that can take on all the competition.”
However, she noted that “the devil is in the data” for investors who now own both companies, as integration details are still up for debate.
Details of the deal
AT&T received $40.4 billion in cash and discharged some of its debt, while the newly-christened Warner Bros. Discovery got a variety of programming to add to its streaming and cable offerings.
“Today’s announcement is an exciting milestone not only for Warner Bros. Discovery, but also for our shareholders, our distributors, our advertisers, our creative partners and most importantly, consumers worldwide,” said David Zaslav, CEO of the new company at the closing . “Through our combined assets and diversified business model, Warner Bros. Discovery offers the most differentiated and complete portfolio of content for film, television and streaming.”
This acclaimed portfolio includes streaming offerings from HBO Max, Discovery+ and CNN+; and cable channels like TNT, TBS, TLC, truTV, Animal Planet, Cartoon Network and more. The acquisition arguably positions the new company to compete with established streaming market leaders like Netflix (NFLX), Apple (AAPL), and Amazon (AMZN).
In addition, AT&T stockholders received approximately one-fourth of WBD’s interest for each AT&T share they held prior to the transaction. As a result, former AT&T shareholders now hold a majority of the new company’s outstanding shares. Both Discovery and AT&T shareholders should take a close look at the fledgling company.
Immerse yourself in the new discovery
The rationale for Discovery is simple. Content is king and the deal secures the company a massive catalog of shows and films.
Most importantly, it secures HBO Max for the company, which is among the most popular entertainment choices right now and is known for delivering premium shows and movies. HBO Max ended 2021 with a total of 73.8 million subscribers worldwide, more than tripling its existing Discovery+ subscriber base. As such, the new company will court over 100 million streaming subscribers worldwide.
“As a combined company, Warner Bros. Discovery is rich in content and has numerous assets for streaming,” Navdeep Saini, CEO of media technology company DistroTV, told Real Money. “WBD is good at (streaming video-on-demand) SVOD, but what the company lacks is a (free, ad-supported streaming TV) FAST platform. The streaming industry is reaching its tipping point.”
He added that from this perspective, the combination and clearer focus on FAST programming will give the company a big boost.
However, not all assessments are so rosy.
“There’s a common wisdom that ‘bigger is better,’ and the combined company will have a lot of power when it comes to things like carriage deals for its linear networks,” Rick Ellis, founder of media analytics firm AllYourScreens, told Real Money. “But bringing the two companies’ streaming businesses together will be a challenge, especially given that their streaming businesses look very different internationally.”
He added that the integration risk is also increased due to management changes, which are somewhat uncertain. That only adds to the debt problems for the newly formed company, which will have to compete with well-funded competitors.
The deal includes clauses that leave the new company hooked on significant amounts of AT&T’s sizable debt stemming from botched deals with DirecTV in 2015 and Time Warner.
“We expect the increased debt burden and uncertainty surrounding key strategic issues to result in an overhang for equities,” commented Michael Nathanson, analyst at MoffettNathanson, in a note to clients. “Additionally, we are concerned about the additional pressure on WBD from AT&T’s shareholder base, which is inclined to sell its 71 percent stake due to a different investment profile.”
While its “neutral” rating breaks with Wall Street’s generally bullish sentiment, it’s a grain of salt worth digesting for any company’s investors.
Focus at AT&T
AT&T shareholders have two questions, both about the new company and the now less-leveraged AT&T.
For the former, debt and the ability to compete with established streaming giants will cloud decisions. As are concerns about many of their AT&T-holding compatriots heading toward the exit. For the latter, the equation seems more positive.
“On the AT&T side, the separation from Warner Bros. will be less distracting for the company,” said AllYourScreens’ Ellis. “Executives never really had a handle on the TV/streaming business, and CEO John Stankey spent a lot of time questioning WB management. In many ways, this deal is a best-case scenario for AT&T.”
The clear focus on areas of competence was also a clear focus of management.
“We are at the dawn of a new era of connectivity, and today marks the beginning of a new era for AT&T,” said AT&T CEO John Stankey. “With the closing of this transaction, we expect to invest at record levels in our growth areas of 5G and fiber, where we have strong momentum as we work to become America’s best broadband company. At the same time, we will keep our focus on shareholder returns.”
Commentary appears to be positive for investors so far as shares are accelerating and general confidence in the company’s ability to invest with a healthier balance sheet and a more secure dividend. Analysts also appreciated the increased focus.
“A more communications-focused company, AT&T looks more like Verizon (VZ) now than it has in years, after overcoming the distractions and lost revenue of a declining satellite video business and the capital commitments of the Warner/HBO media companies,” said the JPMorgan analyst Phil Cusack wrote in a note that the stock was upgraded after the deal closed.
In the end, optimism abounds in everyone when the deal finally goes through. However, judging by the number of question marks remaining, a healthier AT&T seems like the more attractive option of the two.