AT&T and Discovery on Monday announced that they will merge their media assets in a megadeal that creates a stronger rival to Walt Disney and Netflix amid global internet video streaming wars. Discovery stock with no voting rights rose on news of the deal. AT&T stock initially gained but reversed as investors mulled the size of a dividend cut.
Conglomerate AT&T will spin off its WarnerMedia business, which includes the HBO Max streaming platform and combine it with Discovery's domestic and international assets. Cable industry pioneer John Malone is Discovery's biggest shareholder, and effectively has controlled Discovery through high-vote class B shares. But the new WarnerMedia/Discovery will eliminate multiple stock classes. Malone will remain a significant shareholder but without the same voting power.
The combined WarnerMedia/Discovery would have an enterprise value of roughly $150 billion, including debt.
"Discovery would give WarnerMedia much-needed distribution capabilities outside of the U.S. as HBO prepares to launch HBO Max internationally," Wells Fargo analyst Eric Luebchow said in a note to clients. "Clearly, both WarnerMedia and (Discovery) require greater scale in order to compete with the likes of Netflix and Disney — and this potential transaction certainly would be a compelling step in the right direction."
Shares React To Dividend Cut
Discovery stock with the ticker symbol DISCK rose 3.1% to close at 31.69 on the stock market today. DISCK shares do not hold voting rights. Discovery stock traded under the DISCA ticker also initially rose on the deal's announcement but then reversed down. DISCA stock fell 5.1% to 33.85.
Shares in AT&T slipped 2.7% to 31.37, after initially rising, as institutional investors reacted to the dividend cut. AT&T stock has traded up in 2021.
Disney stock fell 2.1% to 170.08. Comcast stock fell 5.5% to 55.46. One wild card for Comcast stock is the Peacock-branded video streaming service.
AT&T Stock: Dividend Cut Coming
The megadeal is structured as an all-stock, Reverse Morris Trust transaction designed to be tax friendly. AT&T's shareholders would receive stock representing 71% of the combined company. Discovery shareholders would own 29%. AT&T will appoint seven board members and Discovery will appoint six.
The combined company will pay AT&T a one-time special dividend of $43 billion. AT&T plans to use the funds to reduce debt.
AT&T will cut its dividend owing to the loss of WarnerMedia's free cash flow. In a regulatory filing, AT&T said it expects to pay "an annual dividend payout ratio of 40% to 43% on anticipated free cash flow of over $20 billion." In 2020, AT&T paid out 55% of free cash flow to shareholders as dividends.
Discovery Stock: International Assets Key
The new company will be led by current Discovery President and Chief Executive David Zaslav, and plans to distribute content over the HBO video streaming platform and Discovery+. AT&T had planned to roll out an advertising-supported version of HBO streaming this year.
A deal with Discovery was favored by AT&T over attempting a merger with Comcast's NBCUniversal, which likely faced regulatory opposition, analysts said.
AT&T acquired media giant Time Warner for $85 billion three years ago. It also recently spun off its DirecTV video business into a new company in a deal with private equity firm TPG.
AT&T's HBO Max had 44.2 million streaming subscribers as of March 31. WarnerMedia's assets also include CNN, TBS and the Warner Bros. movie studio.
AT&T Stock: Discovery Picked Over NBCU Deal
Discovery garners more than half of revenue from outside the U.S.
"Discovery has a call option on transforming HBO Max into a global juggernaut that trades at a deep discount to Netflix and Disney," MoffettNathanson analyst Craig Moffett said in a report.
Some analysts have speculated that Comcast's NBCUniversal would be a better fit for merging with WarnerMedia.
"We think this merger (with Discovery) discussion evidences AT&T's concern about the cost to make HBO Max a long-term winner in global streaming," Bernstein analyst Todd Juenger said in his report to clients. "While a merger of Warner with NBCU would be more compelling strategically, we have come to believe that the current climate in Washington, D.C., makes this proposal unrealistic.
Juenger added that he doesn't expect Comcast to bid for Discovery.
Discovery controls cable TV networks HGTV, Food Network, TLC and Animal Planet as well as sports channel Eurosport.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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