Discovery - AT&T's Warner Media Merger


Discovery - AT&T's Warner Media Merger

Business Description:

  • 800 million monthly unique viewers globally

  • 250 million hours viewed daily

  • Operates under 2 segments: US Networks and International Networks, each divided into advertising and distribution subsegments

  • 65% of revenues in 2020 came from US Networks, 38% Advertising and 27% Distribution

  • 35% of revenues in 2020 came from International Networks, 15% Advertising and 19% Distribution

  • Since shows are factual, expenses are limited compared to competitors with 2020 operating margins of 25% vs 18% for Viacom and Netflix and 2% for Disney (20% in 2019)

  • Stock crashed by 60% after a margin call from Archegos Capital



Merger with AT&T’s (NYSE:T) WarnerMedia

  • Structured as Reverse Morris Trust Transaction, whereby AT&T will spin off Warner Media which will then merge with Discovery

  • Discovery shareholders will own 29% of the new company

  • AT&T will receive $43 billion in a combination of cash, debt securities, and Warner’s retention of certain debt


Catalysts:

  • Recovery from pandemic

  • Content creation/acquisition is less expensive compared to competitors

  • Olympics in 2021 could bring $175 million to $200 million in operating income before depreciation and amortization

  • Discovery+ ARPU expected to 3-4X US Networks Linear

  • Will make Discovery more competitive with non-factual networks


Risks:

  • Streaming business is very competitive with Netflix, Disney+, Amazon Prime, Apple TV+ and others

  • Streaming business might be a cash flow drain in initial years

  • Cable Networks businesses are in decline

  • Concentrated business

  • Will no longer be a fully factual network

  • Synergy costs might be bigger than expected

  • Will take some of the debt of AT&T on balance sheet

  • AT&T shareholders unhappy about the dividend cut from the company


Financial Analysis:

  • Revenues of $10.7 Billion in FY20 down from $11.1 Billion in FY19

  • Operating income of $2.73 Billion in FY20 vs $3.19 Billion in FY19

  • Net income of $1.21 Billion in FY20 down from $2.06 billion in FY19

  • Free Cash flow of $2.33 Billion in FY20 vs $3.11 million for FY19