When AT&T (NYSE: T) introduced an settlement to merge its WarnerMedia leisure division with cable community titan Discovery (NASDAQ: DISC.A) (NASDAQ: DISCK) on Might 17, AT&T’s inventory sank. It continued to slip decrease over the following six months and hovers close to a 52-week low on the time of this writing.
The merger will see AT&T cut back its dividend, however that is sensible given the lack of the WarnerMedia division’s income. In trade, shareholders will obtain inventory within the new firm, to be referred to as Warner Bros. Discovery. For my part, this can be a boon for shareholders.
Warner Bros. Discovery is positioned to expertise years of development, whereas the WarnerMedia spinoff permits AT&T traders to higher consider the group on its robust telco enterprise. A have a look at WarnerMedia and Discovery illustrates the potential power of the mixed firm.
Picture supply: Getty Pictures.
When the pandemic struck final yr, WarnerMedia was hit onerous by theater closures, the cancellation of sporting occasions, and a spending pullback from advertisers. This division suffered a year-over-year income drop of 13.7% in 2020.
However in 2021, it skilled a powerful restoration. It earned $25.8 billion in income via three quarters, a 17.7% improve from 2020’s $21.9 billion.
WarnerMedia’s streaming service, HBO Max, helped that income development. The service launched in Might 2020; since then, WarnerMedia’s direct-to-consumer enterprise has elevated income and the variety of HBO subscribers each quarter.
|Quarter||International HBO Subscribers||Direct-to-Client Income|
|Q3 2021||69.4 million||$2.24 billion|
|Q2 2021||67.5 million||$2.14 billion|
|Q1 2021||63.9 million||$1.93 billion|
|This fall 2020||60.6 million||$1.90 billion|
|Q3 2020||56.9 million||$1.78 billion|
|Q2 2020||55.6 million||$1.63 billion|
|Q1 2020||53.8 million||$1.50 billion|
Information supply: AT&T.
Forecasts predict that HBO Max will exceed 100 million subscribers within the subsequent two years. The vast majority of subscribers are from the U.S., giving the service a world development alternative.
HBO Max is not the one purpose for WarnerMedia’s success. Its theatrical income is recovering properly from 2020’s decline. In Q3, it reached $1.3 billion, the best complete because the fourth quarter of 2019. With hits reminiscent of Dune and in style mental properties together with Batman, WarnerMedia’s theatrical income is well-positioned to proceed rising.
Its promoting enterprise can be rejuvenated. Whereas Q3 advert income was down 12.4% yr over yr as a result of timing of sporting occasions and decrease political advert spending, 2021 advert income via three quarters was up 15.1% to $4.9 billion.
Discovery provides its personal strengths to the merger. Its CEO, David Zaslav, will take the reins of the brand new firm. He has been Discovery’s CEO since earlier than it went public in 2008.
Underneath Zaslav, the corporate launched its personal streaming product in the beginning of this yr. Since then, Discovery grew the service to twenty million subscribers via the tip of Q3, up 3 million from Q2.
The streaming service helped the corporate develop Q3 income 23% yr over yr to $3.2 billion. After three quarters, Discovery’s $9 billion in 2021 income positions the corporate to exceed 2020’s full-year complete income of $10.7 billion by the tip of this yr.
Discovery’s success wasn’t due solely to new streaming subscribers. The corporate’s promoting revenue roared again from pandemic-induced declines in 2020, significantly in worldwide markets, the place it skilled 28% year-over-year development in Q3.
The Q3 outcomes adopted Q2’s whopping 88% year-over-year improve in worldwide income. General, 2021 promoting income was up 13% yr over yr to $4.5 billion via three quarters.
Discovery additionally manages its funds effectively. Complete property of $34.3 billion eclipsed complete liabilities of $20.9 billion final quarter. The corporate had $3.1 billion in Q3 money and equivalents and generated free money flows of $1.6 billion up to now this yr. Price financial savings will outcome from the WarnerMedia merger, serving to to proceed Discovery’s monitor file of economic well being.
A win for shareholders
Discovery enhances WarnerMedia very effectively. Discovery’s portfolio of nonfiction tv networks, reminiscent of Animal Planet and the Meals Community, provides to WarnerMedia’s in style fiction choices, which incorporates Pals and the Harry Potter franchise.
Buyers can obtain AT&T’s high-yield dividend, at the moment at an eye-popping 8.62%, till the merger by shopping for the telecom inventory now. When the merger completes in mid-2022, AT&T shareholders will obtain Warner Bros. Discovery shares equal to 71% of the brand new firm. From there, traders can proceed incomes a dividend from AT&T whereas benefiting from Warner Bros. Discovery’s development alternative.
With a potent new firm in Warner Bros. Discovery, and a longtime telecom large in AT&T, which remains to be within the early levels of its 5G community rollout, traders can sit up for compelling alternatives from each corporations within the years forward.
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Robert Izquierdo owns shares of AT&T and Discovery (C shares). The Motley Idiot recommends Discovery (C shares). The Motley Idiot has a disclosure coverage.
The views and opinions expressed herein are the views and opinions of the writer and don’t essentially replicate these of Nasdaq, Inc.