AT&T’s stock was hammered on Tuesday as Wall Street weighed in on the telco’s future — and viewed it as unsexy — after it unloaded its WarnerMedia business to Discovery.
As for the asset buyer Discovery, Wall Street is offering mostly praise to management and hope for the stock price. Closely followed Wells Fargo media analyst Steve Cahall said in a research note that Discovery is really worth $46 to $47 a share in light of the transaction and subsequent assets the company is gobbling up.
“In our convos investors generally agree that Discovery + WarnerMedia = a better company than the two are separately as global direct-to-consumer initiatives benefit from scale, Discovery benefits from HBO/Warner Bros. content and WarnerMedia benefits from Discovery’s management and free cash flow,” said Cahall.
Cahall reiterated his Overweight rating on Discovery’s stock, which is the equivalent of an Outperform.
AT&T surprised Wall Street Monday by saying it will spin off its media division WarnerMedia — which it bought for $85 billion just three years ago — and merge it with Discovery. The move joins household name media brands such as WarnerMedia’s HBO and CNN with Discovery’s HGTV, Animal Planet, Food Network, and TLC under one house.
The newly combined WarnerMedia and Discovery would form one of the largest global streaming platforms in direct competition with Netflix and Amazon. Proceeds from the deal for AT&T will go towards paying down a considerable debt-load of more than $160 billion, which will help as the soon to be pure-play telecom giant builds out its 5G network. AT&T is set to receive $43 billion in a combination of cash, debt securities and WarnerMedia’s retention of certain debt, according to the press release announcing the deal.
Discovery President and CEO David Zaslav is set to lead the newly combined company following the close of the transaction, which is expected to take place in mid-2022. The combined company is targeting an annual $52 billion in sales and $14 billion in adjusted EBITDA (earnings before, interest, taxes and depreciation).
“This transaction creates a powerhouse media company offering investors pure play exposure to best-in-class content assets,” said Bank of America media analyst Jessica Reif Ehrlich. “We estimate the new Discovery/WarnerMedia entity to be worth approximately $148 billion enterprise value. This attributes a 13.5x multiple to 2030E direct-to-consumer operating income before depreciation and amortization (OIBDA) discounted back and a 7.0x multiple on CY22E legacy OIBDA. When applying Discovery’s 29% stake, this equates to an implied Discovery share price range of $39-42/share.”
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