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WarnerMedia’s $43bn Merger with Discovery

By Isabelle Duerbeck and Tim Bamberger (King’s College London), Abilash Prabhakaran (MIT)

Photo: Nikolay Tchaouchev (Unsplash)


Overview of the deal

Acquirer: Discovery, Inc.

Target: WarnerMedia

Total Transaction Size: $43 billion

Closed date: Mid-2022

Acquirer advisor(s): Allen & Co. and JP Morgan Securities

Target advisor(s): LionTree, Goldman Sachs

AT&T (NASDAQ: T) has decided to spin off WarnerMedia and merge it with Discovery, Inc. (NASDAQ: DISCA), creating a total enterprise value of $132 billion and cementing the combined entity’s status as the world’s second-largest media company after Disney by annual revenue. As AT&T has faced increasing competition over streaming, especially against Disney and Netflix, the spinoff could create a more unified, competitive force and accelerate Discovery’s recent pivot towards streaming; yet, there will still be a huge effort in integrating the firms’ marketing and content. Regardless, this spinoff is part of AT&T’s recent, overall strategy in dumping assets and focusing on its core, telecom business. This is because AT&T had bought WarnerMedia for $85.4 billion three years ago and because AT&T had recently sold its cable business DirecTV for $16.25 billion to private equity firm TPG. Regardless, the combined entity will have at least 24.7 million subscribers across its streaming services and include assets, such as the HBO network, CNN, and Warner Bros. Overall, the combined entity will have 71% control by AT&T shareholders and 29% control by Discovery’s shareholders.

“That’s two teams that are best of class, that are leading in the industry. Our view is we just want them to keep doing what they are doing.” - David Zaslav, CEO (Discovery)

Company Details: (Acquirer - Discovery, Inc.)

Discovery, Inc. is an American media company that owns and operates a portfolio of brands, including Discovery Channel, Animal Planet, Science Channel, TLC, Scripps Network Interactive, Food Network, HGTV, and Travel Channel. Since 2020, the company has been focusing on and managing its streaming service Disney+.

Founded in 1985, headquartered in New York City, NY (USA)

CEO: David Zaslav

Number of employees: 9,800

Market Cap: $15.9B (as of 27/05/2021)

EV: $30.0B

LTM Revenue: $10.8B


LTM EV/Revenue: 2.78x


Company Details: (Target - Warner Media)

Warner Media is an international media company that was created in 1989 through the merger of Time Inc. and Warner Communications. Its portfolio comprises different entertainment, news and sports brands including HBO, Warner Bros., ELEAGUE, TBS, Adult Swim, Bleacher Report, Boomerang, CNN, and more. The media assets of Time Warner, now known as Warner Media, were acquired by AT&T in an $85bn takeover three years ago.

Founded in 1989, headquartered in New York City, NY (USA)

CEO: Jason Kilar

Number of employees: 25,000

Market Cap: Listed as AT&T (MCAP: $211.59B as of 27/05/2021)

Revenue: $30.4B

Projections and Assumptions

Short-term consequences

AT&T had made a disaster by acquiring WarnerMedia for almost $90 billion, three years ago, and now selling it for almost half the price. Yet, the upfront cash via the spinoff enables AT&T to better invest in its broadband business, which is already capital-intensive and aiming to be a leader in 5G connectivity. In addition, the upfront cash will help AT&T improve its capital structure as the WarnerMedia acquisition three years ago took on massive debt for the company. In fact, according to analysts, with so much debt, AT&T had no choice in being able to choose between its streaming provider HBO Max and its 5G business. Thus, the spinoff will allow it to strategically focus on its core network business. Yet, as AT&T will have a large stake in the combined entity, AT&T will still be able to have exposure to the growing streaming industry. With millions of paying subscribers, the combined entity is projected to generate $3 billion in cost synergies and $52 billion in revenue and $14 billion in adjusted EBITDA by 2023. Additionally, for DIscovery, the stronger content portfolio could improve subscriber net revenue and gross retention, both in the short term and long term, which is important because media companies’ long term value is assessed on their ability to maintain a reliable stream of loyal, subscribed customers.

Long-term Upsides

The long-term upsides of this mega-merger can be summarized in the size of synergies created. As in the short term, cost synergies in the billions will most likely continue to be a blessing for the new multimedia giant and set them up well for future growth. Some investors predict the market share to significantly cross the “monopoly zone”, outperforming Netflix and Amazon Prime within the next 3-5 years. If the media sector's growth rates prevail as well as a low base interest rate, the amount of corporate debt should be easy to manage. Which would create very large profit margins for shareholders, provided the SEC doesn’t step in. The profits can be used for further business development to generate even greater returns in the long run. Future projections also discuss the potential leveraging of economies of scale to get access to large lines of credit to make huge investments and drive business development more effectively than other competitors. Finally, another synergy not to be underestimated is the strategic assets that would be merged, if the deal is approved. “WarnerMedia has a long and storied track record of premium programming ranging from Warner Bros. blockbuster films to HBO’s library of prestige TV offers and more.” This wide-ranging portfolio of successful movies and TV series has the potential to set the media giant up for growing future success.

Risks and Uncertainties

Despite promising short-term and long-term merits, the risks associated with this deal are becoming clearer. Firstly, there is a significant regulatory risk of the deal not closing. In the case of a termination, AT&T or Discovery would face fees of respectively $1.77 billion and $720 million. Hence, in case of a termination by AT&T, Discovery will get almost 10% of its market capitalization in cash, possibly attracting other strategic buyers. Secondly, with a rapidly expanding media landscape, Discovery faces a growing list of competitors. For example, The Wall Street Journal reported Monday that was currently in takeover discussions with MGM Holdings. Thirdly, the merger will result in a heavily indebted Discovery, run by its current management yet majority-owned by AT&T shareholders. Moreover, the future of WarnerMedia’s current CEO, Jason Kilar, is uncertain. On a press call Monday morning following the announcement, AT&T CEO John Stankey said Kilar still holds his position, but it will be up to Discovery CEO David Zaslav to decide if Kilar still has a job with the new company.

These uncertainties have also been reflected in the stock price of Discovery. Investors have turned on Discovery’s stock since the announcement of the deal—losing nearly 12% by the end of the announcement week. According to analysts at MoffettNathanson, the transaction could complicate the company’s once-simple story. They write “With an immediate focus on reducing heightened leverage, investors will likely be concerned about the potential to starve content investment in this highly competitive arena,” whilst downgrading Discovery’s stock to neutral from buy on Monday.

“When you look at the opportunity to grow a fantastic subscriber base we kind of looked at this and said, ‘it’s time to unleash the media assets to go and seize a multi-hundred-billion-dollar opportunity.’” - John Stankey, CEO (AT&T)


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