to create Warner Bros. Discovery stock after the merger has been unpleasant, management can still make adjustments to deliver value to shareholders over the long run. The new entity will focus on streaming services. Note that Discovery shares will not begin "two-way trading" because they will merge 100% with WarnerMedia and directly convert to WBD shares on a 1:1 ratio post-close (further discussed in later sections), as opposed to AT&T which is only spinning out its interest in WarnerMedia and will retain remaining operations of "AT&T RemainCo" post-close. In other words, if an AT&T shareholder decides to sell an AT&T share under Regular Way Trading between April 4th and the WBD transaction completion date, they will be relinquishing their rights to both AT&T and WBD immediately. Discovery in a merge that equates to a $43 billion transaction. At the end of 2021, the pro forma debt for WBD was over $56 billion. James Gunn Reveals New Superman, Batman Movies and More, Warner Bros. With the 5G transition in full swing, the company can't afford to be distracted with the streaming media wars, paying down debt, and maintaining the dividend all at once. I am a retired law enforcement officer. Making the world smarter, happier, and richer. Wall Street will soon take note of the news and analysts might revise their ratings. However, the media merger has thus far been a The streaming media and telecom worlds were shaken Monday, when AT&T (T -0.63%) announced it would be spinning off its WarnerMedia division and combining it with Discovery (DISCA) (DISCK). Management discussed a number of concerns to be addressed now that the merger is complete. Warner Bros. Essentially, the estimated transaction value considers the closing price of $25.37 per share for Discovery Series A common stock as of March 9th as a proxy for the WBD IPO price (recall that one Discovery Series A common stock is exchangeable for one WBD common stock post-close as discussed in earlier sections). Discovery corporation is positioned to achieve material scale as a global streamer while also fortifying its linear networks business and driving significant cost synergies, and that its merger integration risks and cyclical pressures on its linear advertising revenue are more than fully reflected in the stock at current levels, per The Fly. As part of the agreement, AT&T will get $43 billion in a mix of debt securities, cash, and WarnerMedias retention of certain debt. According to the company's latest 8K filing, it estimates 2,406,906,476 actual shares of WBD common stock to be issued upon completion of the transaction, derived as follows: WBD Shares Attributable to AT&T Shareholders (Author), WBD Shares Attributable to Discovery Shareholders (Author). Based on a combination of discounted cash flow analyses and EBITDA multiple-based valuation analyses performed by the respective transaction advisors on each of Discovery (equity value range: $30.6 billion to $43.1 billion) and WarnerMedia (equity value range: $55.9 billion to $94.3 billion without synergies; $87.3 billion to $127.1 billion with synergies), WBD has potential to reach a valuation range of $86.5 billion to $137.4 billon without synergies, and $117.9 billion to $170.2 billion with synergies post-close. Discovery planned to keep Discovery+ as a standalone streaming platform, as the company weighs how to make more of its content available in a single place. Looking for a helping hand in the market? to the transaction, we have better refined our estimates. If you have an ad-blocker enabled you may be blocked from proceeding. WBD Transaction Structure (AT&T 8K filing, with annotations by Author. Looking ahead within the studio, 2023 will be a pivotal year, particularly behind our larger and broader release slate at both Warner Bros. Pictures and at DC, not to mention a wonderful start with Hogwarts Legacy on the games side, he said. AT&T and Discovery sound optimistic about the new company's outlook. Please note that I am in the process of planning a subscription service with Seeking Alpha's Marketplace. You can click on the 'unsubscribe' link in the email at anytime. The new streaming behemoth will have a huge library of 200,000-plus hours of content, from Warner Bros. Studios, HBO and MBO Max, The Turner channels (TNT, TBS, CNN), as well as Discovery's comprehensive portfolio of unscripted content. This increased its subscriber numbers to 76.8 million. Discovery, with Discovery shareholders holding the rest. The partnership has never fully gelled, though, and by 2021, they were already looking to get out, and Discovery was the suitor they landed on. Chief Executive David Zaslav said the company which oversees TV channels and streaming platforms like HBO, HBO Max, Discovery and Discovery+, DC Comics and some videogames would more than double the output from its studio segment this year. -2.01% After last years messy mega-merger, executives at Warner Bros. S&P rates WBDs debt as BBB-/positive, the lowest level of investment grade. pertaining to the WarnerMedia spinoff, the telecom giant also submitted a, to the SEC, covering every "nitty-gritty" detail from pro-forma historical WarnerMedia statement of operations that were not previously available, all the way down to key terms of the merger agreement with. ) It's worth noting that these forecasts were before Discoverys merger announcement. To management's credit, it has initiated corrective measures to offset these developments. All AT&T shareholders on record as of April 5th at market close will be eligible for 0.24 WBD shares for each share of AT&T share owned. At this point, the majority of heavy lifting (related to restructuring charges etc.) We will not sort of chase aggressively behind subscriber growth. net asset value under U.S. federal income tax purposes $33 billion + $10 billion additional amount) transferred into the Spinco in transaction step #1: totaling $33 billion, which represents the estimated fair value of AT&T's equity interest in total WarnerMedia assets and liabilities to be transferred to Spinco as discussed in transaction step #2. Our analysis provides a deep dive on growth drivers present in the secular market to identify outperforming investments. Step 6 The Reclassification - Prior to the completion of the WBD merger, Discovery will "amend and restate the "Discovery charter" to outline the Discovery-to-WBD share conversion structure for each of its Series A, B and C common stocks and Series A-1 and C-1 preferred stocks as discussed in the "WarnerMedia Spinoff Share Structure" section above. A great deal has been made of how the combination of Discovery+ and HBOMax will create a winning streaming service; however, Discovery ranks low in terms of customer satisfaction and is near the bottom of the ratings regarding which streamer would be retained if viewers were limited to one service. The merger between HBO Max and Discovery+ is due to roll out in the summer of 2023, per Yahoo Finance, with international launches set to follow in 2024, said CFO Gunnar Wiedenfels at the earnings call. The distributed Spinco common stocks can be exchanged for 0.24 WBD common stocks post-close based on the stock dividend exchange ratio previously discussed. Please disable your ad-blocker and refresh. The conversion will ultimately result in 71% AT&T shareholder ownership in WBD, with the remaining 29% ownership in WBD attributable to Discovery shareholders. I am a also value / buy and hold investor. Due diligence should be exercised and readers should engage in additional research and analysis before making their own investment decision. WBD was Desroches mentioned that Discovery currently has 700 million shares outstanding, while 1.7 billion new shares will come to market as part of the transaction. Author's Note: Thank you for reading my analysis. Discovery ("WBD"). Discovery, they discovered that the previous management had been overly optimistic with their projection of Warner Bros. prospects. In fact, Amazon is the sole company with a share price gain over that time frame, and it lags the S&P by more than 15%. has fallen 5.8% over that period. are met. It's a busy time for Warner, who besides the Discovery merger are also reportedly in the market for a buyer for The CW, a network they co-own with Paramount, the parent company of CBS (and ComicBook.com). Discovery posted fourth-quarter 2022 earnings on Feb. 23, with revenue of $11.01 billion decreasing Essentially, the issued Spinco common stocks represent the rights to shares of WBD common stock distributed to existing AT&T shareholders as of record date. The company reported nearly $450 million in next generation revenue, a 55% increase over the prior-year quarter. Step 2 Issuance of Spinco Debt Securities - Prior to AT&T's distribution of rights to shares of WBD common stock to existing AT&T shareholders as of record date and the final merger completion, the Magallanes, Inc. Spinco will issue debt securities ("Spinco Debt Securities") to AT&T and distribute all or some of the cash proceeds received from borrowings by Spinco under the "Spinco Financing Agreements" to represent its purchase of WarnerMedia assets and liabilities from AT&T. Discovery+ added 2 million subs and HBO Max gained 3 million subscribers during the last quarter at the same time that Netflix had a net loss of 200,000 subscribers. However, I admit I have reservations regarding the companys debt load and financial prowess. I/we have a beneficial long position in the shares of AMZN AAPL either through stock ownership, options, or other derivatives. Following the merger early last month, WBD ranks as the number-three player in the U.S. video streaming business behind Netflix and Disney. I also have concerns regarding the toll cord cutting may take on the companys future results. Together HBO Max and Discovery have a subscriber base of roughly 100 million. Copyright 2023 MarketWatch, Inc. All rights reserved. The forward P/E for the company is 8.68x, and the 5-year PEG is 0.43x. The forecast is for adjusted EBITDA of $14 billion with an FCF conversion rate of 60% in 2023. Considering the latest disclosure of WBD transaction details (e.g. Discovery's share price when the new company began trading earlier this year. The consensus 12-month price target of the five analysts rating the stock is $37.25. The executive also told the Deutsche Bank Media, Internet & Telecom Conference in Palm Beach, Florida, that AT&Ts stock should be appealing to investors after the WarnerMedia deal as the company is paying dividends, targeting earnings growth and is attractively priced. If you Jakub Porzycki / NurPhoto / Shutterstock.com. Ahead of the fourth-quarter earnings, some analysts said the results would present an opportunity for management to reframe the companys path forward. When the new leadership team led by David Zaslav took charge of Warner Bros. This might explain the initial fall in Warner Bros. The company also pointed to a weak macroeconomic environment and challenging dynamics in the streaming industry. WBD was trading at $24.88 before markets closed for the holiday weekend. Discovery currently has 700 million shares outstanding, while 1.7 billion new shares will come to market as part of the transaction. We had previously estimated about 2.4 billion WBD shares outstanding post-close according to AT&T's stock dividend structure of 0.24 WBD shares for each AT&T share. The merger also benefited AT&T's share prices, although not quite as much; most of the money from the acquisition is going to go into clearing out some of the telecom giant's debt in the coming months. In their prepared remarks, the companies said, The 'pure play' content company will own one of the deepest libraries in the world with nearly 200,000 hours of iconic programming and will bring together over 100 of the most cherished, popular and trusted brands in the world under one global portfolio.. To ensure this doesnt happen in the future, please enable Javascript and cookies in your browser. (I update this score on at least a quarterly basis for readers.). Based on 14 ratings, nine analysts had WBD stock as a moderate buy, five rated it as a hold, and only one appraiser had the company as a sell. Upon completion of the transaction, AT&T shareholders will, together, own 71% equity interest in WBD, with Discovery shareholders owning the remainder 29%. What Is the Standard Deduction for People Over 65 in 2023? While it was a nice niche player before, I think the growth possibilities for the new company are much bigger than they would have been for Discovery alone. What's been going on and is now the time to sell out of the stock? Just a few years ago, the same team acquired and integrated Scripps Networks into Discovery. There was an unknown error. By Russ Burlingame Discovery (WBD -2.01%). Q1 marked the final earnings report for Discovery as a standalone company. I am not receiving compensation for it (other than from Seeking Alpha). Discovery, Inc. distribution of Spinco common stock to eligible AT&T shareholders as of record date), which occurs prior to completion of the WBD merger. Members of High Dividend Opportunities get exclusive ideas and guidance to navigate any climate. Discovery, with Discovery shareholders holding the rest. However, Warner Bros. Is This the Best Streaming Stock for 2023? AT&Ts WarnerMedia unit and Discovery Inc said on Friday that the two firms have completed the merger. Asked about the risk of future dividend cuts, Desroches said that the dividend is not only safe, but its size gives the company financial flexibility. Founded by four brothers in 1923, Warner Bros. is a giant in the film industry, but has changed hands more time than most fans can count. After working in the energy industry for 18 years, he decided to change careers in 2016 and concentrate full-time on all aspects of writing. The Hollywood Reporter is a part of Penske Media Corporation. Its an app that people can use just like a regular wallet to store their card details and information. My sister has always struggled with money and drugs. Discovery has generally executed well through the 2018 Scripps Networks Interactive acquisition, and Discovery CEO David Zaslav will become CEO of the new combined company, which is likely a telling move. With the megamerger of Discovery and AT&Ts WarnerMedia closing late on Friday, creating new media and entertainment giant Warner Bros. AT&T's shares were down 2.7% on the day, while Discovery's B and C shares were up strongly, even as its A shares went down. The thinly traded shares (ticker: DISCB) that are 95% owned by media mogul and Discovery board member John Malone traded Tuesday at $68.88, down $1.02. We will not launch any new markets for the time being. totaling approximately $42 billion received from a combination of bridge loans, term loan credit agreements, note issuances, and revolving credit agreements obtained or completed through commitments with JPMorgan Chase Bank, Goldman Sachs Bank, Goldman Sachs Lending Partners LLC, and "certain other financial institutions". What the Smartest Investors Know About Warner Bros. Now that the close of the WarnerMedia deal is approaching, we are near the starting line of a new era for AT&T, said Stankey on Friday. I could be characterized as a safety first investor. The company posted FCF of $238 million, and operating expenses decreased 8% to $907 million. Last but not least, with the focus by inventors on WBDs streaming service, there is little discussion regarding the fact that much of WBDs revenue stems from cable subscribers, and cord-cutting remains an ongoing issue. The combination of issued Spinco Debt Securities and cash proceeds from Spinco Financing Agreements provided to AT&T as part of transaction step #2 must total $43 billion, which represents the total consideration paid by Spinco to AT&T in exchange for its equity interests in the assets and liabilities of WarnerMedia (i.e. Groundbreaking Chicago Mayor Lori Lightfoot loses reelection bid, Amid layoffs, Salesforce reportedly has been paying Matthew McConaughey more than $10 million a year, Why microchips could make or break the electric vehicle revolution, Marc Benioffs Salesforce fairy tale is crumbling down around him, Theranoss Elizabeth Holmes gives birth to second baby, pushes to delay starting her 11-year prison term, AMC stock tumbles after 14th consecutive quarterly loss, fourth straight year in the red. Discovery (NASDAQ: WBD) when the stock went public last April. Earlier this year, the merger of AT&T 's ( T -0.57%) WarnerMedia with Discovery ( DISC.A) ( DISC.B) ( DISCK) was given the green light by U.S. regulators. David has covered a wide variety of financial and lifestyle topics for numerous publications and has experience copywriting for the retail industry. The idea is that Warners has not been fully capitalizing on the brand's potential. Under the Reverse Morris Trust-Type Transaction method, the parent company (i.e. takes the proverbial cake, with a stock price that plummeted over 65%. Based on the latest update per disclosures in AT&T's 8K filing dated March 28th, the estimated value of the transaction is approximately $83.4 billion. However, we have taken additional consideration of the valuation sensitivity analysis performed by the WBD transaction advisors, Allen & Company and J.P. Morgan, as disclosed in AT&T's most recent 8K filing dated March 28th to further gauge the upside potential in WBD post-close. *Average returns of all recommendations since inception. AT&T shareholders will own 71 percent of the merged firm, with Discovery shareholders owning the rest. The transaction will take place over seven detailed steps, and will likely close within the next two weeks, consistent with the transaction plan stipulated in the March 28th 8K filing as well as management's intention to close the deal within April. NFLX also held $6 billion in cash. The streaming space is crowded, and Warner Bros. Echoing our thoughts from the previous coverage, we believe the fast-approaching WBD spinoff will be a promising play for participating AT&T investors. Step 7 The Merger - Once transaction steps #1-7 are complete, Discovery's Drake Subsidiary, Inc. merger subsidiary will merge into Magallanes, Inc. Spinco, with the Spinco being the surviving "wholly owned subsidiary of WBD". Discovery, Wall Street is turning its attention to the outlook for the new conglomerates stock that began trading on Monday under the ticker symbol WBD.. Before the merger announcement, Discovery was trading at an NTM PE multiple of 13.2x, which looked undervalued. The stock could be a long-term winner based on its the strong growth potential in the streaming industry. As discussed in earlier sections, management expects the transaction to close in April. ET. Although I endeavor to provide accurate data, there is a possibility that I inadvertently relay inaccurate or outdated information. Discovery reported a fourth-quarter net loss of $2.08 billion, or 86 cents a share, after a profit of $38 million, or 8 cents a share, in the same quarter in 2021. Only about a quarter of the analysts rated the stock as a buy. By comparison, the S&P 500 index At the time of the merger, AT&T's investors owned around 70% of the combined company, so there were lots of shareholders who might have sold to get the new ticker out of their portfolio. Youre reading a free article with opinions that may differ from The Motley Fools Premium Investing Services. Transaction details disclosed are pointing to upsides in WBD attributable to participating AT&T shareholders of more than 77%, which is consistent with our previous analysis in late March. While most AT&T shareholders are income-focused, the WBD transaction could make an attractive one-time trade to capitalize on promising near-term upside potential resulting from a valuation re-rate event. Upon completion of the merger, each Spinco common stock issued under transaction step #4 and distributed to existing AT&T shareholders as of record date under transaction step #5 will automatically convert into 0.24 shares of WBD common stock. Sign up for THR news straight to your inbox every day. Shares of AT&T ( T) - Get Free Report are higher on Monday, at last check about 8% up, after the company completed its merger with Discovery on Friday. Financial Insight in Your Inbox: Sign Up for GBR's Daily Newsletter, Maximize your savings with these 3 expert tips. The specific transaction structure will be executed in the seven steps as follows: Step 1 The Separation - Prior to AT&T's distribution of rights to shares of WBD common stock to existing AT&T shareholders as of record date and the final merger completion, AT&T will have to transfer all of its equity interests in the assets and liabilities attributable to its WarnerMedia business to the Magallanes, Inc. Spinco. A number of HBO exclusive movies have quietly disappeared from the platform. Madonna Breaks Silence on Death of Brother Anthony Ciccone: You Planted Many Important Seeds, Paramount CFO: Streaming Content Spending Could Come in Below $6B Target In 2024, BBC Journalism Union Members Vote in Favor of Strike. And right or wrong, management has made a decision to invest a lot of the incoming funds into a number of investment initiatives. People may receive compensation for some links to products and services on this website. Another massive streaming giant round the corner? After all, there has been a more chaotic revolving door over in the HBO C-suite since the merger with AT&T, with lots of turnover and restructuring. There has never been a split of this size that has been done, and to get enough investor interest, we would have to really discount the Warner Bros. Learn More. Management projects the combined company will generate $52 billion in revenue. In a research note to investors, Feldman said that the merged Warner Bros. The potential synergies and economies of scale looked to position the combined company well to compete in the media and entertainment industry. Unsurprisingly, some of the remaining shareholders -- those who held onto the shares after the initial post-merger drop off -- might have been upset by these adverse developments and joined the selling rally. In the merger presentation, AT&T said it will pay out about 40% to 43% of free cash flow as its dividend, while giving a $20 billion-plus estimate for free cash flow Under the stated terms, AT&T will receive $43 billion from the merger in a combination of cash and equivalents, and the retention of debt. Shop Pay is an innovative payment solution developed by Shopify. After the next few quarters, investors will have a better sense of how things are playing out and whether the stock is one to hold onto. Discovery (NASDAQ:WBD) has slipped over 20%, Comcast (CMCSA) is down about 18%, shares of Disney (DIS) and Amazon (AMZN) have both fallen around 25%, and Netflix (NFLX) takes the proverbial cake, with a stock price that plummeted over 65%. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. A merger rarely goes without hiccups, so while the dip in Warner Bros. AT&T is also still behind competitors in 5G deployment, and is up against stiff competition in the fiber broadband space. Disclosure: I/we have a beneficial long position in the shares of DISCK either through stock ownership, options, or other derivatives. Zaslav, in the companys earnings release, said that major restructuring decisions were behind us. However, Warner Bros. That same study revealed that when questioned regarding their level of satisfaction among SVOD services, HBOMax received the highest score. Here is a stat that might surprise many readers: every stock listed above has underperformed the S&P 500 over the last three years by a wide margin. The new company, of which Discovery shareholders will own about 29%, should become more of a force in global streaming. Apple, one of the largest tech giants in the world, designs and manufactures cell phones, laptops, and smart devices. Latest Technology & Communications News and Updates. Management also emphasized that the company will take a circumspect approach to content spend. Its options had been the spinoff, in which AT&T stockholders will receive shares in the merged company in addition to their existing AT&T shares; a split-off, which would have allowed shareholders to choose between stock of AT&T and the new company; or some combination of the two. Discovery. Were it not for the effects of foreign exchange, International would have recorded a 30% increase. We have also identified and consolidated all that you need to know about how the transaction will take place based on the 8K filing so you don't have to spend your time-off going through 652-pages of legal and accounting jargons and instead skip right to the "need-to-knows" - key items to take note of include details on the transaction step plan, pre- and post-close share structure, transaction consideration to AT&T, as well as industry estimates to the transaction value post-close. Make this your go-to guide to understanding stock charts. To make the world smarter, happier, and richer. ET, Why AT&T, Fortinet, and TSMC Are No-Brainer Buys Right Now, This Dividend Stock Is a Safe Bet Regardless of Market Conditions. Many of the offers appearing on this site are from advertisers from which this website receives compensation for being listed here. Discovery's outlook for the year. The company posted a 5% growth in U.S. advertising and an 11% increase in distribution revenue due to Discovery+. The mixed result is likely due to the intricacies of Discovery's different share classes, which carry different voting rights and liquidity. Is DISCA stock a good buy after the AT&T merger news? Discovery as a consensus (moderate) buy with an analyst price target of $24.79. If you have taken a look at AT&T's latest 8K filling dated March 28th, you would notice that the filing registrant is "Magallanes, Inc.". Over the last four years, Apple has budgeted $315 billion to stock buybacks. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. Poorer than expected performance of late from WarnerMedia was also highlighted. And as I'm looking under the hood here again, CNN+ is just one example, and I don't want to go through sort of a list of specific examples, but there's a lot of chunky investments that are lacking what I would view as a solid analytical, financial foundation and meeting the ROI hurdles that I would like to see for major investments. $33 billion fair value attributable to WarnerMedia assets + $10 billion additional amount) funded by a combination of debt securities and cash from Spinco provided to AT&T. All Right Reserved. Bill Peters is a Los Angeles-based MarketWatch reporter who covers earnings. Consequently, I rate WBD as a HOLD. Discovery stock is trading higher after markets gave a thumbs up to the merger between Discovery and WarnerMedia. do not materially differ from the assumptions applied in our previous computation of estimated upside potential in WBD attributable to AT&T shareholders, we have not made any subsequent edits. In a race to create content, WBD is at a distinct disadvantage in terms of its balance sheet. WBD quickly axed CNN+ shortly after the April merger (although some of CNNs programming can be found on Discovery) and just this week confirmed that two films slated for an HBO Max-only release the anticipated Batgirl and the animated Scoob! I have no business relationship with any company whose stock is mentioned in this article. In 2000, internet service provider America Online bought Time-Warner, Inc. to form AOL Time Warner, but when the dot-com bubble burst, that partnership dissolved quickly. The Coke vs. Pepsi debate doesn't just apply to the supermarket the brands are also rivals in the stock market.