On Friday, AT&T (T) and Discovery closed the $43B "Reverse Morris Trust" deal that turned their media operations into one larger, potentially key player in that space, while separating the core telecom and communications businesses.
The merger combined AT&T's Time Warner business (including Warner Bros, HBO, Cinemax, Turner Broadcasting, CNN, CNN+, HBO, HBO Max, etc.) with Discovery (including Discovery, Discovery+, HGTV, Science Channel, Cartoon Network, TCM, TNT, Food network, TLC, Animal Planet, etc.). AT&T moves forward as a more finely tuned, much lighter company focused on 5G, wireless communications, and fiber-optic networking.
The new, combined media company moved forward as Warner Bros. Discovery, trading on the Nasdaq on Monday under the symbol (WBD) .
Under the terms of the agreement, at closing AT&T received $40.4B in cash and WarnerMedia's retention of certain debt. AT&T shareholders received 0.241917 shares of the new WBD for each share of AT&T common stock held. AT&T shareholders received 1.7B shares of WBD leaving those shareholders with roughly a 71% control of the new firm, and former Discovery shareholders in control of the balance.
Former Discovery President and CEO David Zaslov has assumed those same positions at Warner Bros. Discovery, while AT&T CEO John T. Stankey, who just succeeded Randall Stephenson in 2020, will retain that role.
Where Does This Leave AT&T?
Readers should recall that AT&T just about a month ago guided 2023 revenue growth for low single digit (%) growth with adjusted FY EPS ranging from $2.50 to $2.60. As far as the dividend is concerned, the firm expects to wind up with a payout ratio of 40% versus free cash flow, which is forecast to reach $20B. This permits the firm to invest roughly $48B (if all goes according to plan) expanding its 5G capabilities and coverage, while improving its fiber optics network. More on the dividend? AT&T will trade ex-dividend tomorrow (Wednesday) and dish out a quarterly payment of $0.28 per share to shareholders of record this Thursday, payable May 2nd. This is well below the $0.52 payout that stood for five consecutive quarters. Still, annualized, the payout adds up to $1.11, which would be good for a yield of 5.65%.
Does that yield stand for long? AT&T reports next week. Wall Street is looking for adjusted EPS of $0.59 with a range spanning from $0.53 to $0.62, on revenue of $29.5B.The firm does have to spend on developing the newly refocused spending, perhaps more so than expected. The firm also has to fix the balance sheet which at year's end was simply atrocious. Not only did the firm's current ratio come to a mere 0.7, but the firm's net cash position came to 0.14% of total long-term debt. Include the $40.4B received from the deal (as if it had no other purpose) and that 0.14% only becomes 0.4%. Not impressed.
Oh, one other thing. AT&T stood at year's end with a tangible book value of $-17.70 per share (not kidding). In addition, the already mentioned balance sheet "boasted" total assets of $561.622B. Goodwill? $133.223B Other intangible assets? $159.493B. That means that AT&T had $292.716B in "intangible" assets on the book, or 52.1% of total assets. That means that just 47.9% of the firm's total assets were the kind that you could actually define. Awesome.
Wall Street
I can find five analysts rated at three stars or better by TipRanks who have opined on AT&T this week, and four sell-side analysts (3 stars+) who have initiated coverage of WBD as well. First AT&T... all five have rated AT&T as a "buy" or buy equivalent. The average target price set by the five is $23.80, with a high of $26 (Frank Louthan of Raymond James, 3 stars, and a low of $22 twice... Michael Rollins of Citigroup, 5 stars and Philip Cusick of JP Morgan, 4 stars). I currently see a last sale of $19.73.
As for WBD, the five star rated Bryan Kraft of Deutsche Bank rates the stock as a "buy" with a $48 target price, while Hamilton Faber of Atlantic Equities and Vijay Jayant of Evercore ISI (both rated at 3 stars) both rated WBD as a "buy" or buy equivalent with identical $40 target prices. Lastly, for star rated David Heger of Edward Jones placed a "hold" rating on the stock with no target price.
My Thoughts?
I think we wait until AT&T reports before we cast judgement. Warner Bros. Discovery reports about a week later. I'll trade anything. As for investment, WBD has its work cut out for it in a competitive landscape, but at least the initial balance sheet is not awful from a current perspective, but AT&T? What in the world? I'd say that if telecom was your thing, go to Verizon (VZ) but that balance sheet is no bowl of cherries either, and Verizon's tangible book value is even grosser (is that a word?). I'm sorry folks. The best stock mentioned there is probably WBD, but none of these call my name. At seven times forward looking earnings, AT&T is no way inexpensive. There are better places to put your money. Just my opinion. Unless you have an edge. That gives me an idea.
Trade Idea (minimal lots)
- Purchase 100 shares of T at or close to the last sale of $19.71.
- Write one April 29th (post-earnings) $22 call for about $3.25.
- Receive one dividend payment of $0.28 per on May 2nd.
Net basis: $16.18
I have no position as yet, but because I just thought of this I have to let you folks go first.
