the stock was the biggest loser of the
Tuesday, a day after announcing a mega-space to get rid of its media assets and focus on its 5G and fiber-Internet telecommunications core. This strategic refocus has been viewed as positive by investors and analysts, but it comes at the cost of reduced dividends after the proposed spin-off closes. Worse yet, it doesn’t solve all of the company’s problems.
AT&T stock (ticker: T) fell 5.8% on Tuesday, to close at $ 29.55, after losing 2.7% on Monday. Actions of
(DISCA), which will combine with WarnerMedia, fell 1.6% to $ 33.31, extending Monday’s 5.1% drop.
The deal will provide AT&T with $ 43 billion in cash and other assets to repay debt. AT&T shareholders will own 71% of the WarnerMedia / Discovery handset, with Discovery shareholders owning the remainder. Discovery CEO David Zaslav will lead the company and the merger is expected to end in mid-2022.
AT&T has said it will “reset” its dividend as part of the transaction, to a payout ratio of around 40% of free cash flow, which management estimates to be at least $ 20 billion in 2023. That means about $ 8 billion in annual payout, or about $ 1.11 per share (AT&T has about 7.19 billion shares outstanding, according to its latest filing). Should post-fallout stocks trade for the same annual return
“(VZ) current 4.3% – given similar leverage and company profile – that would be worth $ 186 billion, or about $ 25.88 per share.
Several Wall Street analysts made a version of that calculation this week and came up with similar values for AT & T’s telecommunications companies after the WarnerMedia split. The valuation of the newly formed media company is a more difficult task and depends on the opinion of investors on its future streaming prowess.
Management said Monday they expected WarnerMedia / Discovery to generate around $ 13 billion in adjusted EBITDA – short of earnings before interest, taxes, depreciation and amortization – in 2023, and leverage. of 5 times the net debt on the adjusted EBITDA at closing. This involves around $ 65 billion in net debt on the new entity.
The market assigns very different multiples to streaming winners and legacy media players.
(DIS), which is hugely successful in streaming in Disney +, trades 17.3 times its enterprise value compared to the 2023 Ebitda estimate, while broadcasting pure-play
(NFLX) goes 22.3 times. Media companies ViacomCBS (VIAC) and Premerger Discovery each trade around 8.5 times their 2023 EV / Ebitda ratio.
WarnerMedia / Discovery will bring HBO Max and Discovery + together under one roof, along with a vast library of content from their multiple brands and a combined annual production budget of approximately $ 20 billion per direction. But the business today is more of a collection of cable networks and a Hollywood movie studio, with streaming services not expected to turn a profit for several years.
At a Disney-like multiple of 17 times the 2023 EBITDA, WarnerMedia / Discovery would have an enterprise value of $ 221 billion and its equity would be worth $ 156 billion after subtracting net debt. AT & T’s 71% shareholder stake would be worth $ 110.8 billion, or about $ 15.40 per current AT&T share, if the stock gets the same credit in the market as Disney. At an Ebitda ratio of 8.5 times EV / 2023 in line with
and Discovery today, the same calculations give a value of about $ 4.49 per share.
Add in the $ 25.88 value of AT & T’s telecommunications business, and AT&T stock today could be worth between $ 30.37 and $ 41.28, depending on whether investors believe WarnerMedia / Discovery will look more like to ViacomCBS or Disney in the future.
The reality is probably somewhere in between. But after a massive selloff of nearly 10% in the past two days, AT&T stock is trading below these two values.
Another way to play the deal is to use Discovery stock, which will turn into a 29% stake in the combined media company. With a fully diluted market value of $ 22.5 billion at Tuesday’s close and net debt of around $ 13 billion, Discovery’s $ 35.5 billion enterprise value implies a value of $ 122.4 billion business for WarnerMedia / Discovery. AT&T shareholders’ stake in the media company is reportedly worth $ 40.8 billion after debt, or $ 5.67 per share.
For now, the market seems to value WarnerMedia / Discovery much more like ViacomCBS than Walt Disney.
Write to Nicholas.Jasinski[email protected]