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. 

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.