Tuesday, January 18, 2022

Discovery Shares Rally, Wall Street Warms To Approaching WarnerMedia Deal

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Discovery inventory jumped immediately as a previously skeptical Wall Street is more and more out pounding the desk for the inventory forward of the David Zaslav-led firm’s merger with WarnerMedia.

The shares hit $30 persevering with a rally that gathered steam final week on an upgraded ‘buy’ ranking from BofA Securities. Analyst Jessica Reif Cohen mentioned then, “We believe Warner Bros. Discovery has the potential to be the most dynamic global media company.” Today, in a follow-up be aware titled “Stage is set and the show is about to start,” she boosted her fourth-quarter income, free money movement and EPS estimates and mentioned she’s inspired by operational momentum heading into the merger.

Also immediately, UBS analyst John Hodulik anticipated a clear near Discovery’s cope with AT&T early within the second quarter. In a be aware targeted on the pending transaction, mentioned he expects Discovery to quickly de-lever after because it focuses on continued progress at HBO Max.

It’s higher late than by no means for Discovery, as analysts and buyers had been sluggish to embrace the deal introduced final April. Transformational because it was, the information didn’t stem the inventory’s downward trajectory. Shares had already began to drop from their 52-week excessive close to $80 in March and continued to hit a low of underneath $22 in mid-December. So $29.34 (the place the shares ended up closing immediately) isn’t precisely meme inventory territory, though some on Reddit famous that proudly owning WarnerMedia doesn’t appear to be priced into Discovery shares.

BofA has a $45 worth goal on Discovery. Hodulik says the deal must be a catalyst for the shares.

In half, Wall Street might have had jitters concerning the deal closing, Those might have been allayed over the previous month by a handful of headlines together with unconditional clearance by the European Union, a positive personal letter ruling from the IRS on tax remedy and significantly upbeat feedback by AT&T CEO John Stankey at a current media convention. Given all that, it appears the merger will possible get its greenlight from the DOJ by mid-year as anticipated. (The deal additionally requires nods from a number of different regulators abroad and a sure vote by Discovery shareholders, which isn’t more likely to be an issue with huge holders John Malone and Advance/Newhouse onboard.)

Stankey mentioned that DOJ approval may “accelerate and happen earlier.” (It may additionally slip, he added, “But I see nothing going on in that, that causes me any concern.”)

“You saw that the EU cleared this without any concerns. I would say that if you think about the company’s holdings in the EU versus elsewhere in the world, there shouldn’t be anything that jumps out that says, ‘Gosh, there should be something hiding there that’s going to be a problem.’”

Other constructive information contains WarnerMedia’s reveal that HBO/HBO Max had exceeded targets for the fourth quarter with almost 74 million (78.3M) subscribers – on the higher finish of earlier steering to 70-73 million subs.

And Discovery had a victory in Poland in late December when the president there vetoed laws that will have pressured it to divest a key asset, Poland’s largest personal tv community, TVN.

The urgent query is the merged firm’s go-to-market technique for DTC. Reif Cohen and others count on it’ll finally migrate HBO Max and Discovery+ to a mixed platform, “optimizing the broad appeal of their complimentary content mix to boost engagement and minimize churn.” She mentioned the the mixed library “also creates the potential to create a FAST service [free ad-supported] similar to Pluto and Tubi in order to increase the TAM [total available market] and capture incremental subscribers.”

Discovery can’t announce all that a lot earlier than its approvals are in place. It has mentioned it anticipates price synergies from the merger of $3 billion, which Reif Cohen  calls “highly achievable, if not conservative, given the several areas of duplicative expenses (e.g. tech, ad/distribution sales force etc.).” The deal actually is anticipated to end in deep cuts.

Before that, one other questions is how AT&T technically plans to unload WarnerMedia. It hasn’t mentioned but if it favors a cut up or a by-product. Hodulik thinks the telco is leaning in direction of a cut up – or AT&T shareholders exchanging their previous AT&T shares for a mixture of shares within the new, leaner AT&T and Warner Bros. Discovery, with shareholder capable of decide their publicity to WBD.

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