AT&T’s $43 billion deal with Discovery will help it reduce debt ahead of costly 5G build-out
AT&T Inc. is spinning off its WarnerMedia business in a deal with Discovery Communications Inc. as the telecommunications giant refocuses its attention on its wireless business and looks to reduce its debt position ahead of a costly 5G build-out.
The two companies formally announced plans to combine AT&T’s T,
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AT&T shares are up 3.2% in morning trading and on track for their highest close since March 17, 2020, according to Dow Jones Market Data. Discovery shares are off 1.7%, after being up as much as 11.4% earlier in the session.
Various media outlets reported on plans for the deal over the weekend.
The spin marks a quick turnaround for AT&T’s media foray, with the company having acquired WarnerMedia back in 2018 in a deal valued at more than $80 billion. But AT&T took on debt for that acquisition, and this latest deal is a chance for the company to reduce its debt load while shifting its focus to the wireless business at a pivotal moment.
The company is in the midst of an expensive 5G build-out and it recently committed more than $23 billion toward spectrum licenses that it won at a critical wireless auction. Some analysts previously expressed skepticism about AT&T’s ability to spend adequately on the creation of its 5G network while simultaneously navigating WarnerMedia’s costly transition to streaming.
“For AT&T shareholders, this is an opportunity to unlock value and be one of the best capitalized broadband companies, focused on investing in 5G and fiber to meet substantial, long-term demand for connectivity,” AT&T Chief Executive John Stankey said in a release. Shareholders will also “get a stake in the new company, a global media leader that can build one of the top streaming platforms in the world.”
The company expects “significant debt reduction” through the deal and said in a release that its ratio of net debt to adjusted earnings before interest, taxes, depreciation, and amortization could be “in the 2.6x range after transaction closes and less than 2.5x by year-end 2023.” AT&T’s net-debt-to-adjusted-Ebitda ratio was 3.1 times at the end of the first quarter, according to the company’s latest earnings release.
AT&T said in a release that upon the close of the transaction, its dividend would be “resized to account for the distribution of WarnerMedia to AT&T shareholders” and that the company would target an annual dividend payout ratio of 40% to 43% of free-cash flow.
MoffettNathanson analysts Craig Moffett and Michael Nathanson wrote that the deal makes strategic sense for both parties, as Discovery will benefit from greater content breadth, while AT&T “had no choice” given that its balance sheet “allowed neither the aggressive investment required for HBO Max nor the 5G wireless push (nor, for that matter, for the consumer fiber business).”
Moffett and Nathanson still have concerns about whether this move is “enough” to help AT&T, as “Time Warner’s Ebitda supported a little over $43 billion of debt at AT&T, so AT&T is still over-levered after the transaction.” The key test is whether the company will be able to grow its wireless business, they said.
Moffett has a sell rating on AT&T’s stock while Nathanson has a buy rating on Discovery’s.
The deal won praise from investor Elliott Investment Management.
“AT&T has now executed on its promise to streamline operations and refocus on its core businesses, all while improving operational execution, enhancing its financial position and advancing its corporate governance,” Managing Partner Jesse Cohn and Portfolio Manager Marc Steinberg said.
As for Discovery, the move represents a “dramatic transformation” for a company that ultimately may not have had a large enough addressable market to compete in the aggressive streaming landscape on its own, according to Lightshed Partners analysts led by Richard Greenfield. Discovery Chief Executive David Zaslav, who will be heading the combined entity “gets to run a much bigger company that is far better positioned than the assets he brought to the table,” the analysts wrote.
Speaking on a conference call after the deal announcement, Zaslav said that he wasn’t interested in selling assets as he builds out the combined business. “We want to keep it all,” he said, calling out the potential of Discovery’s own “really nourishing content” like HGTV combined with WarnerMedia’s blockbusters like “Superman” and “Game of Thrones.”
