AT&T/Discovery: getting your money back will have to do

For AT&T, breaking even was good enough. On Monday it confirmed that three years after closing a blockbuster $110bn acquisition of Time Warner, it is leaving Hollywood. Its WarnerMedia unit will combine with US cable-TV network mainstay, Discovery. AT&T shareholders will own 71 per cent of the enlarged, listed business.

Discovery shares rallied a tenth in early Monday trading. That implied valuation reveals that the legacy Time Warner unit is roughly worth what AT&T paid for it five years ago. 

AT&T hoped to build a challenger to Netflix and Disney. Instead, a confused strategy clashed with a heavy cash requirements. It could not balance investments required both for its core telecom business and in its movie and TV production units. The good news for AT&T shareholders is that they will at least have a stake in the future Discovery/Warner business, though AT&T will not.

Discovery boss, David Zaslav, the longtime, highly paid chief executive, will guide the new company. Its spending on content, roughly $20bn annually, will rival that of Netflix. The new company will carry $55bn of total debt with $43bn of that being incrementally raised. Those new cash proceeds will return to AT&T. The Discovery/Warner combination’s enterprise value will approach $150bn.

Compare that figure with those for Netflix and Disney, each of whom have valuations exceeding $225bn. Yet the formidable combined libraries of Discovery and WarnerMedia — which includes HBO and Warner Brothers as well as the Turner cable networks — should take on any direct-to-consumer video offering, anywhere. 

The separation offers no magic balance sheet fix for the legacy AT&T. While the group gets a one-time infusion of cash, it loses the healthy cash flows from WarnerMedia. Its group leverage ratio, just over three times net debt to ebitda, will not drop much for now. 

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After the failed acquisitions of both Time Warner and DirecTV, together costing $175bn, AT&T shareholders are surely exhausted and traumatised. Media dealmaking has led to a string of calamities. AT&T will probably not be the last. Given that, getting one’s money back looks like a mercy.

This analysis of the deal was published after details were published. Lex’s initial take on the transaction can be found in separate note in this stream.



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