Discovery (DISCA) Stock Rockets On AT&T (T) Merger News

Discovery, Inc. (NASDAQ: DISCA) is screaming for the top in the market this morning on strong volume after announcing that it has entered into an agreement with AT&T (NYSE: T). The $43 billion deal is expected to create a streaming powerhouse that will take charge in the rapidly changing entertainment industry. 

Here’s what’s going on:

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DISCA Stock Heads Up On Merger News

In the press release, AT&T and Discovery said that they’ve reached a definitive agreement to combine WarnerMedia’s premium entertainment, sports, and news assets with Discovery’s leading nonfiction and international entertainment and sports business to create a premier, standalone global entertainment company. 

According to the release, AT&T  will receive $43 billion in a combination of cash, debt securities, and WarnerMedia’s retention of certain debt. Moreover, AT&T shareholders would receive stock representing 71% of the new company, leaving Discovery shareholders to own 29% of the new company. 

DISCA said that the board of directors of both companies have approved the transaction, which is expected to create substantial shareholder value on both sides of the coin by:

  • Leadership. The transaction will bring together the strongest leadership teams in the space to create a powerhouse. 
  • Stronger Together. It will also bring some of the world’s best content creators, and high-quality series and film libraries in the media business together. 
  • Speed. Both companies were working to bring direct-to-consumer streaming services to their global customers. This will help speed up that process. 
  • Script or No Script. The transaction will also combine WarnerMedia’s robust studios and portfolio of iconic scripted entertainment, animation news, and sports with Discovery’s global leadership and unscripted and international entertainment and sports. 
  • Size. The combination of the two companies will make a massive entity with scale that’s hard to ignore. In fact, by 2023, the combined company is expected to generate $52 billion in revenue with adjusted EBITDA coming in at $14 billion. The company is also expected to have an industry leading free cash flow conversion rate of around 60%. 
  • Reduction Of Overall Cost. Finally, the companies estimate that the cost synergies will lead to a reduction in overall cost of around $3 billion annually. 

Management Commentary

In a statement, John Stankey, CEO at AT&T, had the following to offer:

This agreement unites two entertainment leaders with complementary content strengths and positions the new company to be one of the leading global direct-to-consumer streaming platforms. It will support the fantastic growth and international launch of HBO Max with Discovery’s global footprint and create efficiencies which can be re-invested in producing more great content to give consumers what they want. 

For AT&T shareholders, this is an opportunity to unlock value and be one of the best capitalized broadband companies, focused on investing in 5G and fiber to meet substantial, long-term demand for connectivity. 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.

The above statement was followed up by DAvid Zaslav, CEO at DISCA. Here’s what he had to say:

During my many conversations with John, we always come back to the same simple and powerful strategic principle: these assets are better and more valuable together. It is super exciting to combine such historic brands, world class journalism and iconic franchises under one roof and unlock so much value and opportunity.

With a library of cherished IP, dynamite management teams and global expertise in every market in the world, we believe everyone wins…consumers with more diverse choices, talent and storytellers with more resources and compelling pathways to larger audiences, and shareholders with a globally scaled growth company committed to a strong balance sheet that is better positioned to compete with the world’s largest streamers. We will build a new chapter together with the creative and talented WarnerMedia team and these incredible assets built on a nearly 100-year legacy of the most wonderful storytelling in the world. That will be our singular mission: to focus on telling the most amazing stories and have a ton of fun doing it.

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The Bottom Line

The bottom line here is simple. Two of the biggest players in the entertainment industry are combining their businesses, becoming a global powerhouse with sheer size and capabilities that will allow it to tower over its competition. All in all, that’s exciting news that sets the stage for significant growth ahead. 

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