Is AT&T Stock Price Too Low? How much is it worth after WarnerMedia Spin.

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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.

Gabby Jones / Bloomberg

AT&T

the stock was the biggest loser of the

S&P 500

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

Discovery

(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

Verizon Communications

“(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.

Walt disney

(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

Netflix

(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

ViacomCBS ‘

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.

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