UPDATED: Shares of Discovery and AT&T both charged out of the gate higher after the companies announced their proposed merger of WarnerMedia and Discovery, but that quickly changed.
Discovery shares opened up 10% Monday — before the stock tumbled into negative territory by 10:45 a.m. ET. The stock had fallen 4.6% as of 2 p.m. ET, amid a broader market decline. Shares of Discovery closed down 5% for the day Monday, to $33.86 apiece.
Shares of AT&T, which will receive $43 billion in cash as part of offloading WarnerMedia into the new venture, popped as much as 5% early on. The price drifted down and shares were trading +1% as of midday before they closed down 2.6% at $31.39 per share.
Comcast stock fell 5.5% Monday and Charter Communications declined 3.3%, while Disney shares dropped 2.1% and Netflix closed down 0.9%.
The drop in Discovery’s stock comes after it had a major sell-off in March (as did ViacomCBS shares) precipitated by analyst downgrades and a forced trade of billions of dollars worth of shares by an investment firm.
Under the terms of the AT&T-Discovery pact, AT&T shareholders would hold 71% of the new company, while Discovery shareholders would own 29%. The new company also will assume debt carried by WarnerMedia. The deal is expected to close in mid-2022, subject to approval by regulators and Discovery shareholders.
Discovery chief David Zaslav will lead the combined WarnerMedia-Discovery, which is yet unnamed. The two companies claimed the combo will yield at least $3 billion in annual cost synergies — and that the new entity will have more firepower to scale up a global direct-to-consumer streaming business that pulls together assets including HBO Max and Discovery Plus.
“It is abundantly clear why this deal makes strategic sense for each side,” analysts Craig Moffett and Michael Nathanson wrote in a research note Monday.
Discovery’s linear networks will get a lift by the inclusion of CNN for news and TV rights to the NBA, NFL, MLB and NCAA basketball for sports. Per estimates by the MoffettNathanson team, the new company will instantly become the largest home of linear TV impressions, representing 28% of the 2020 U.S. viewing time and 24% of U.S. national advertising. “Better still, it will be under-monetized, as it will generate only 20% of national affiliate fees,” the analysts wrote. “While we rightly worry about the long-term health of TBS and TNT, we would assume that Discovery will move key Turner sports and news content to Discovery Plus, to make it a broader and more attractive offering which will help their ability to grow those more valuable impressions.”
For AT&T, while the timing of its deal to spin off WarnerMedia was surprising, “the action was not,” per Moffett and Nathanson. “The market was never going apply a Disney-like multiple (say, by using on 2024 revenue multiple for HBO Max) that would give AT&T full sum-of-the-parts credit for the potential value of HBO Max.”
Ultimately, AT&T was faced will the choice of whether it would invest in 5G wireless networks or HBO Max. The telco’s balance sheet, the MoffettNathanson team pointed out, did not allow for an aggressive push on both fronts.
Another take on the Discovery-WarnerMedia deal came from Bernstein Research’s Todd Juenger, who wrote that “desperate times lead to desperate actions.”
“We think this merger idea would be an explicit acknowledgement that neither company believes it can succeed in the streaming future alone,” Juenger wrote. “We don’t blame them for doing something, collecting some synergies, giving themselves more options. It’s better than doing nothing. But whether this idea is ‘better than nothing’ is not the operative question.”
Taking two businesses where the vast majority of the cash flow is derived from linear TV — a “structurally impaired business,” according to Juenger — “does not create a better business,” the analyst wrote. In terms of future options, he added, “it’s not clear how the streaming offerings would be combined/packaged together, and how that creates a new product(s) which would lead to a consumer proposition that would attract more subs at higher ARPU at higher margin.”
