AT&T got an initial thumbs-up from investors Monday after the company said it would be spinning off its WarnerMedia assets, combining them with Discovery, leaving AT&T a more concentrated bet on the future of communications.
AT&T (ticker: T) shares were up as much as 5% Monday morning to a 52-week high, before giving back some of the gains by the afternoon. Shares of Discovery (DISCA) reversed an earlier rise and are down 3.6% Monday afternoon.
AT&T’s surprising decision Monday to unwind its media efforts will have broad ramifications for the telecom and content world. For investors, the move will give them distinct ways to play two of the hottest trends in technology: the rollout of 5G and direct-to-consumer streaming.
The transaction caps a contentious chapter in AT&T’s history in which the century-old company grew into a sprawling conglomerate. It also marks another bold move for the John Malone-controlled Discovery.
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AT&T shareholders will own 71% of the new company and Discovery shareholders will keep the remaining 29%. AT&T will ultimately reduce its net debt by $43 billion at closing. The all-stock deal will be structured as a Reverse Morris Trust, which means it will be a tax-free transaction in which WarnerMedia is first spun off from AT&T and then combined with Discovery.
The name and ticker symbol of the stand-alone company are still to be determined. The media giant’s properties will include HBO, Discovery, TNT, TBS, CNN, Food Network, and HGTV, plus the HBO Max and Discovery+ streaming services and the Warner Bros. film studio.
Management projects that the combined media company will have $52 billion in revenue in 2023, making it the No. 2 player in the media big leagues, behind only Walt Disney (DIS).
Analysts forecast Disney will have about $93 billion in revenue in 2023, with Comcast’s (CMCSA) NBCUniversal pulling in $37 billion. Streaming pure-play Netflix (NFLX) is forecast to have $39 billion in revenue that year.
Discovery’s longtime CEO David Zaslav will lead the new company and sit on its board. AT&T will nominate seven of 13 total board members. The companies expect the deal to close by the middle of next year. It follows AT&T’s spinoff of DirecTV agreed to earlier this year, as well as Verizon Communications ’ (VZ) sale of its much smaller media portfolio two weeks ago.
A deal between WarnerMedia and another media company had been the subject of speculation on Wall Street almost since AT&T acquired the assets in 2018. NBCUniversal was seen as a possible suitor, with a potential combination creating a Disney look-alike. Comcast shares are down 5.5% Monday.
AT&T agreed to acquire Time Warner in 2016 for about $85 billion including debt, but the deal was held up by an antitrust challenge from federal regulators. It finally closed in June 2018, and AT&T soon after renamed the division WarnerMedia. It began to cut costs and restructure the business, shifting its focus from cable television and theatrical films to direct-to-consumer streaming. That culminated in the launch of HBO Max, an expanded service that includes the HBO library and new productions, plus a bevy of originals and catalog content from other WarnerMedia assets.
Discovery, meanwhile, completed a $15 billion acquisition of Scripps Networks in March 2018, bulking up on reality and documentary channels and content. It stepped into the streaming arena at the beginning of 2021, with the launch of Discovery+.
Both companies have ambitious streaming plans and subscriber targets, which will require investing billions of dollars in content production, licensing, and marketing in the coming years. AT&T and Discovery see $3 billion in annual cost savings as a result of the merger.
The current AT&T had struggled to satisfy a shareholder base looking for simultaneous growth from both 5G and streaming. Now, shareholders will have a distinct way to invest in each.
The new Discovery will have also have the advantage of increased scale, with more content and production capacity.
“The fact of the matter is direct-to-consumer is a global opportunity that is rapidly evolving, and the pace of that evolution is accelerating. To compete and win, you must build global scale,” AT&T CEO John Stankey said on a call to discuss the transaction on Monday morning. “And simply put, to invest the kind of capital we need, we need the instruments of capital necessary to do so. This is a move to align each of our businesses with the right asset and capital base for their respective future success.”
It also removes the so-called “conglomerate discount” from AT&T, and allows management to focus on each business’ unique needs.
Telecom in the 5G and fiber-internet era has its own set of opportunities and challenges, as does a company with a portfolio of cord cutting-pressured cable channels, a movie studio, and a pair of growing streaming services. This deal doesn’t change those facts, but it allows AT&T to focus on keeping up with Verizon and T-Mobile US (TMUS) in wireless, while providing WarnerMedia and Discovery with a deeper content library to compete in the streaming wars.
AT&T’s net debt will be 2.6 times its adjusted Ebitda—earnings before interest, taxes, depreciation, and amortization—after the WarnerMedia spinoff. AT&T had previously planned to get down to 2.5 times by the end of 2024.
That’s the lowest debt load the company has had in years, and potentially frees up cash for its telecom investments. The company now expects to spend $24 billion a year on its network, $2 billion more than before. AT&T will also pare back its dividend as part of the transaction, bringing the payments down to about $8 billion a year, versus roughly $15 billion last year. AT&T stock had been trading at a dividend yield of nearly 7% for most of the past year, and the market had been anticipating a potential cut.
AT&T stock has returned 26% including dividends over the past year, versus 11% for Verizon and 48% for the S&P 500. Discovery stock is up 74%.
Write to Nicholas Jasinski at [email protected]
