AT&T Merging Its WarnerMedia Unit with Discovery in $43B Deal

AT&T (T) is spinning off its WarnerMedia unit and merging it with media company Discovery (DISCA). AT&T stock fell 2.7% on Monday and dropped a further 4.27% in extended-hours trading. Discovery stock dropped 5.05% on Monday.

AT&T primarily provides telecom services and operates one of the largest wireless networks in the U.S. It bought Time Warner for $85.4 billion in a deal closed in June 2018, as it sought to branch into the media and entertainment business. AT&T then rebranded its entertainment division as WarnerMedia.

In a restructuring move, AT&T is combining WarnerMedia with Discovery to form a new publicly traded media company. The transaction will generate $43 billion for AT&T in cash and debt.

AT&T shareholders will own 71% of the combined company, while Discovery shareholders will receive a 29% stake in the new company.

“AT&T shareholders will retain their stake in our leading communications company that comes with an attractive dividend. Plus, they will get a stake in the new company, a global media leader that can build one of the top streaming platforms in the world,” said AT&T CEO John Stankey.

AT&T and Discovery expect the merger to create a global leader in streaming services while simultaneously cutting costs and increasing revenue. They estimate an annual cost savings of $3 billion. Additionally, the combined media company is projected to generate $52 billion in revenue in 2023 and deliver $14 billion in adjusted EBITDA. The increased cash flow will fund further investments in its content and digital realms, as well as the company’s direct-to-consumer advertising activities.

If all goes as planned, the transaction will close in mid-2022, and Discovery President and CEO David Zaslav will lead the combined company.

AT&T anticipates that the WarnerMedia spinoff will boost its capital structure and allow it to invest more in its telecom business. (See AT&T stock analysis on TipRanks)

Oppenheimer analyst Timothy Horan reiterated a Hold rating on AT&T stock without assigning it a price target.

“T has been restructuring itself to lower costs and reinvest in high growth areas such as 5G wireless (C-Band), HBO Max, and broadband,” noted Horan.

Consensus among analysts on Wall Street is a Hold based on 5 Buy, 7 Hold, and 2 Sell ratings. The average analyst price target of $30.70 implies 2.14% downside potential to current levels.

AT&T scores a 7 out of 10 on TipRanks’ Smart Score rating system, implying the stock’s returns are likely to align with market performance.