WarnerMedia-Discovery Combination Boosts AT&T’s Growth Prospects

AT&T Inc. (NYSE: T) has completed the pending transaction of combining its WarnerMedia business with New York-based Discovery, Inc. The deal to this transaction was signed between the parties in May 2021.

The aforementioned business combination has created Warner Bros. Discovery, Inc., which will start trading on the NASDAQ under the ticker symbol ‘WBD’ effective today.

Shares of AT&T rose 1.7% to close at $24.14 on Friday. AT&T is a $173-billion telecommunications, technology, and media services provider. The company is headquartered in Dallas, TX.

Rationale of the Transaction

Warner Bros. Discovery is a standalone media and entertainment giant with a revenue expectation of $52 billion in 2023. The newly born company’s adjusted earnings before interest, tax, depreciation and amortization (EBITDA) are anticipated to be $14 billion and free cash flow conversion is predicted to be 60% in 2023. Also, costs synergies of $3 billion are anticipated in the years ahead.

The new media company’s portfolio will include franchises, content, and brands related to streaming, film, and television. In addition to Discovery’s HBO, CNN, Discovery Channel, and other businesses, Warner Bros. Discovery will operate sports, entertainment, and other businesses of WarnerMedia.

AT&T has financially benefited from this transaction, as it received cash amounting to $40.4 billion and debt retention of WarnerMedia. The company intends on using the cash resources from this transaction for lowering debts and boosting its fiber and 5G scope as well as rewarding shareholders handsomely.

In addition to the cash and debt portion, AT&T shareholders gained a stake in Warner Bros. Discovery at the rate of approximately 0.25 WBD’s shares for every single share of AT&T held at the time of closing the transaction.

Overall, approximately 71% stake in Warner Bros. Discovery is owned by AT&T shareholders and the rest are with Discovery’s stakeholders.

Official Comments

AT&T’s CEO, John Stankey, said, “We are at the dawn of a new age of connectivity, and today marks the beginning of a new era for AT&T.”

Meanwhile, the CEO of Warner Bros. Discovery said, “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. We are confident that we can bring more choice to consumers around the globe while fostering creativity and creating value for shareholders.”

Wall Street’s Take

A few days ago, Frank Louthan, a Raymond James analyst, maintained a Buy rating on AT&T with a price target of $32 (32.56% upside potential).

“We continue to believe a more focused vision along a simpler line of business creates a solid scenario for share price appreciation in 2022 and a solid, double-digit total return,” said Frank.

Also, another analyst, Craig Moffett of MoffettNathanson reiterated a Hold rating on the stock with a price target of $19 (21.29% downside potential).

Overall, AT&T has a Moderate Buy consensus rating based on seven Buys, six Holds, and one Sell. This rating points towards analysts’ cautiously optimistic view of the company. AT&T’s price forecast of $28.92 suggests 19.80% upside potential from current levels. Over the past year, shares of AT&T have fallen 19.4%.

Risk Analysis

Per TipRanks Risk Factors tool, AT&T stock is at risk mainly from three factors: Finance & Corporate, Tech & Innovation, and Legal & Regulatory. These categories contribute six risks each to the total 26 risks identified for the stock.

Conclusion

The WarnerMedia-Discovery business combination is a win-win for AT&T shareholders. While they get rewarded with WBD shares immediately, AT&T’s efforts to lower debts and boost growth prospects in fiber and 5G will help them bag long-term gains.

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