Now, that's a deal.
AT&T (T) and Discovery (DISCA) have agreed to a deal where AT&T spins off its media assets and merges them with Discovery in order to create a media giant that will, according to plan, compete better with streaming entertainment leaders Netflix (NFLX) and Walt Disney (DIS) .
There are questions, though. Just how does this deal break down? Just who does this deal work for? Good deal for all parties? Maybe.
I'll let you know up front that I am long AT&T and Discovery DISCA. I sold some Discovery after Monday's morning's Market Recon hit publication and before I knew I was going to cover this deal for Real Money later on Monday morning. So, yes, I have an interest.
Under the proposed deal that is not likely to close until mid-2022, AT&T properties including Warner Brothers film and television studios, streaming service HBO Max, and cable television networks such as CNN, TBS, TNT, and the Cartoon Network coming from the AT&T side will join with streaming service Discovery Plus, and cable TV networks Discovery Channel, TLC, Animal Planet, the Food Network, HGTV, and the Travel Channel from the Discovery side.
AT&T will receive $43 billion in cash, debt securities and debt retention, with AT&T shareholders controlling 71% of the new, and still unnamed company and Discovery shareholders owning 29%. Discovery Chief Executive Officer David Zaslav will lead the new company, while AT&T's Jason Kilar will retain his role as WarnerMedia CEO after the merger.
One thing this deal largely does is combine complementary content footprints while creating at least some limited synergies, while competition for the streaming viewer grows, especially now with the pandemic (very hopefully) starting to wind down. Discovery and WarnerMedia together generated $14 billion in revenue for the full year 2020.
Discovery recently told us that Discovery Plus had reached 15 million subscribers while HBO Max as of March was up to 9.7 million. By comparison, Netflix can boast 208 million subs, while Disney+ recently "disappointed" with just less than 104 million subscribers.
What does this mean for those two industry leaders? And what does it mean for Apple (AAPL) , Amazon (AMZN) , Comcast (CMCSA) , and ViacomCBS (VIAC) , which all competed in the space? Could be bad news, unless... unless this deal acts as a catalyst for more deals?
What if Apple decided to spend that cash on a Comcast or a ViacomCBS? ViacomCBS brings content at a much smaller market cap. What if Amazon made a move? There are still a lot of balls that if not in the air, certainly could be. What if one of those mega-caps or Disney moves in on this deal, despite the hefty break-up fees that both AT&T and Discovery have agreed to? Remember nothing closed until it closes.
As for AT&T
AT&T has made clear that the company's generous dividend policy, which is part of the reason that this name is in my portfolio, will be adjusted to reflect an annual payout ratio of 40% to 43% of free cash flow expected to land at more than $20 billion.
One distinct and I think positive take is just how aggressive CEO John Stankey has been in shedding AT&T of non-core assets and returning the company's focus to its core telecom business as it prepares to really pay catch up as that business moves toward a transition to a 5G future. Note that AT&T paid $85.4 billion for these media assets in 2018, and also took a nasty loss in selling part of the DirecTV business. This after key competitor Verizon (VZ) also just made the move to shed its media assets at a sizable loss. It would appear that some hard lessons have been learned.
How I Am Playing This Game
As I have mentioned, I took some money off of the table Monday morning. I took both Discovery and ViacomCBS down from full positions each to about a half position, just to lock in the unexpected overnight profits.
I have not reduced AT&T as of yet. I need to hear more on that dividend. Fortunately, both Stankey and Zaslav will be making the media rounds over the next few hours. If I determine that the dividend is safe, not only would I not sell any AT&T, I would probably add on dips moving forward, and go beyond a full position.
That said, though I took some profits this morning, the one name that I would consider adding back to full on any coming weakness would be ViacomCBS. Not that I know anything, I really do not, but you have a lot of content there and a company small enough to be in play considering all of the giants already involved in the field.