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AT&T, Warner Bros. Discovery Deal Leaves Plot Twists for Investors


Primetime TV came early — really early — on Monday morning for investors as the blockbuster deal between Discovery and AT&T (T) had closed, clearing up the picture for the new Warner Bros. Discovery  (WBD) .

Judging by the market’s reaction, the deal got high ratings for each firm, with shareholders who were already tuned in getting a nice boost. Even as share trends split a bit on Tuesday, the sentiment overall remains positive.

“These media-conglomerate merger deals are strategically for gaining more diverse content. This falls in line with the Disney (DIS) acquisition of Fox (FOXA) a few years back which achieved a more diversified portfolio of content and facilitated the launch of Disney+,” Kira Baca, Chief Revenue Officer at IP rights firm Rightsline told Real Money. “With the merger of Discovery, which is heavily in the non-scripted documentaries, lifestyle, and DIY brand, and WarnerMedia’s scripted features and episodic brands and channels, they have the opportunity to capture a combined market to rival all the competition.”

But she noted that “the devil is in the data” for investors now holding both firms as details about integration remain open for debate.

Details of the Deal

AT&T received $40.4 billion in cash and offloaded a portion of debt while the newly dubbed Warner Bros. Discovery received a host of programming to add to its streaming and cable offerings.

“Today’s announcement marks an exciting milestone not just for Warner Bros. Discovery but for our shareholders, our distributors, our advertisers, our creative partners, and, most importantly, consumers globally,” David Zaslav, CEO of the new company proclaimed upon the closing. “With our collective assets and diversified business model, Warner Bros. Discovery offers the most differentiated and complete portfolio of content across film, television, and streaming.”

Included in this highly touted portfolio are 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 firm to compete among incumbent streaming leaders like Netflix (NFLX) , Apple (AAPL) , and Amazon (AMZN) .

Also, shareholders of AT&T received approximately a quarter of a share of WBD for each share of AT&T they held prior to the deal. As such, prior AT&T shareholders now hold a majority of outstanding shares in the new entity. Both shareholders of Discovery and AT&T should examine the newly-minted company closely.

Digging Into the New Discovery

The rationale for Discovery is straightforward. Content is king and the deal secures a massive catalog of shows and films for the company.

Most importantly, it secures HBO Max for the company, which is currently among the most popular entertainment offerings and is known for providing premium shows and movies. HBO Max ended 2021 with a combined 73.8 million total global subscribers, more than tripling the existing base of Discovery+ users. As such, the new company will court over 100 million streaming subscribers globally.

“As a combined company, Warner Bros. Discovery is content-rich and has plenty of assets for streaming,” Navdeep Saini, CEO of media technology firm DistroTV told Real Money. “WBD is good on (streaming video on demand) SVOD, but what the company is missing is a (free ad-supported streaming TV) FAST platform. If recent reports from Nielsen are any indication, FAST is the way forward in a highly competitive streaming industry that’s reaching its tipping point.”

He added that from this vantage point, the combination and clearer focus on FAST programming will be a major boost to the company.

However, not all assessments are so rosy.

“There is a conventional wisdom that “bigger is better” and the combined company will have a lot of power when it comes to things such as carriage deals for its linear networks,” Rick Ellis, founder of media analysis firm AllYourScreens told Real Money. “But combining the two company’s streaming businesses is going to be challenging, especially given the fact that their streaming businesses look very different internationally.”

He added that integration risk is also heightened due to management changes that remain somewhat uncertain. That only adds to debt load issues for the newly formed company that will compete with deep-pocketed peers.

The agreement holds clauses that leave the new company on the hook for significant amounts AT&T’s sizeable debt, accrued by bungled deals DirecTV in 2015 and Time Warner.

“We expect the elevated debt load and uncertainty around key strategic questions to be an overhang for shares,” MoffettNathanson analyst Michael Nathanson commented in a note to clients. “In addition, we are worried about the added pressure on WBD from AT&T’s shareholder base inclined to sell the 71 percent stake due to a different investment profile.”

While his “Neutral” rating breaks with the overall bullish sentiment of Wall Street, it is a worthwhile grain of salt for investors of each company to digest.

Tightening Focus at AT&T

The questions for AT&T shareholders are twofold, both on the new company and in terms of the now less-indebted AT&T.

For the former, debt and ability to compete with established streaming giants will cloud decisions. As will concerns about many of their AT&T-holding compatriots heading to the exit. For the latter, the equation seems more positive.

“From the AT&T side, shedding Warner Bros. will be less of a distraction for the company,” AllYourScreens’ Ellis said. “Executives never really had a handle on the TV/streaming business and CEO John Stankey spent a lot of time second-guessing WB management. In a lot of ways, this deal is a best case scenario for AT&T.”

The laser focus on areas of competence was a clear focus from management as well.

“We are at the dawn of a new age of connectivity, and today marks the beginning of a new era for AT&T,” AT&T CEO John Stankey said. “With the close of this transaction, we expect to invest at record levels in our growth areas of 5G and fiber, where we have strong momentum, while we work to become America’s best broadband company. At the same time, we’ll sharpen our focus on returns to shareholders.”

The commentary appears positive for investors so far, as shares accelerate and overall confidence in the company’s ability to invest with a healthier balance sheet and a safer dividend. Analysts also appreciated the firmer focus.

“A more Communications-focused company, AT&T now looks more like Verizon (VZ) than it has in years after shedding the distractions and revenue drag of a declining satellite video business and the capital obligations of the Warner/HBO media businesses,” JPMorgan analyst Phil Cusack wrote in a note upgrading the stock upon the deal’s finalization.

In the end, the bullish sentiment abounds on each as the deal finally comes through. However, judging by the number of question marks remaining, a healthier AT&T appears the more attractive option of the two.

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