Summary
This upcoming merger is creating a true giant in the media and streaming space that will start trading blows with the likes of Netflix or Disney, seemingly overnight.
The unique combination of great long-term prospects and unjustified short-term valuations can make Warner Bros. Discovery one of the best investment opportunities of the year.
A brilliant example of deep value being hidden in plain sight, many investors might look back upon this point asking themselves how the painstakingly obvious was missed.
simpson33/iStock via Getty Images We are finding ourselves on the eve of one of the biggest business deals of the year. The finalization of the deal is expected to happen in Q2 of 2022, but it should not be that big of a surprise if things happen even sooner than that.
As it was announced back in May of 2021, AT&T ( T ) will be spinning off its Warner Media division which is going to merge with Discovery ( DISCA ) ( DISCK ). The merger will give birth to Warner Bros. Discovery, which is going to become a new streaming and media powerhouse.
Warner Bros. Discovery is a brilliant example of deep value being hidden in plain sight. The emerging streaming giant has the potential to double your initial investment within a year, but might as well give you a chance to clinch on to a multi-bagger early on, as the future for WBD seems bright. The deal that is making things happen
In May of 2021, AT&T and Discovery have announced the biggest deal in the media space in years. John Stankey and Discovery’s David Zaslav took the business world by surprise announcing that AT&T will spin off its WarnerMedia division in order for it to merge with Discovery, forming a new media and streaming giant. Major takeaway points:
The new company will be called “Warner Bros. Discovery” and David Zaslav will be taking the helm as their first CEO.
AT&T shareholders are getting 71% of the new company, while Discovery’s shareholders get the remaining 29%. The merger is supposed to complete in mid-2022. No regulatory headwinds have been expected.
The deal creates a content library that can be qualitatively and quantitatively measured against other competitors in the industry.
The new company will become an FCF machine expected to produce $52 billion in revenues, $14 billion in EBITDA and should be accompanied by a 60% FCF conversion already in 2023.
Debt is going to play a part since the new company should have close to $60 billion in gross debt at the point of the merger, creating an estimated x5.0 gross leverage.
Warner Bros. Discovery’s content library can be compared to its main competitors in both quality and quantity. In fact, it brings so much to the table that some of them might grow increasingly displeased with this merger over time.
The content portfolio as shown in the infographic below best displays the true potential and the meaning of this merger. The portfolio covers a very wide selection of content, ranging from some of the greatest cinematic achievements on one end (LoTR, HP, GoT, etc.) to some of the “low intensity” content suitable for your average Sunday family gathering (TLC, Food Network, Discovery, etc.). Source: AT&T’s and Discovery’s merger presentation
Quantitatively speaking, WBD’s portfolio will consist of about 200,000 hours of programming, which would already cement it at the very top of the pyramid of streaming wars. The content covers all major categories of scripted, unscripted, news, and sports. Furthermore, the new company will carry an extremely good brand recognition internationally. WBD is already present in 220 different countries in 50 different languages. The deal will also provide significant synergies savings up to $3 billion/year that can be reinvested back into new content.
Stankey and Zaslav pointed out that the two companies already spend a combined $20 billion per year on content . To put things into perspective, Netflix is spending $17 billion per year doing the same while Disney’s ( DIS ) spending is in the area of $10 billion per year.
The billionaire media mogul John Malone has agreed to relinquish his 25% controlling interest in Discovery, a move widely regarded as a huge stamp of approval for the deal. “After over 30 years of being involved in developing Discovery as a global information and entertainment company, the opportunity to combine with WarnerMedia to create the ultimate consumer offering in its space is compelling. The industrial logic of this investment grade, synergistic combination, under the leadership of […]
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