WarnerMedia to merge into Discovery

All documents here.

• To merge WarnerMedia with Discovery in all-stock, Reverse Morris Trust transaction
• To transfer WarnerMedia to Magallanes (SpinCo, incl $43b debt, to pay special dividend to AT&T, also $15b debt from Discovery, leverage 5x at closing)
• To be separated as dividend or exchange offer
• Next to merge with Drake Subsidiray (= Discovery)
• AT&T shareholders to own 71% stake, Discovery shareholders 29%
• To close mid 2022
• Termination fee if merger not consummated by 230715: Discovery to pay $720m or AT&T to pay $1.77b
• Supported by John Malone and Advance/Newhouse (together own 44% of Discovery)
• New Discovery
• Expect cost synergies 3b $/yr
• To own 200k hr of programming
• CEO David Zaslav to be CEO (Jason Kilar remains CEO of WarnerMedia)
• To deleverage to 3.0x in 24 mo (long-term target 2.5-3.0x)
• Targets 2023: rev $52b (o/w >15b from D2C), adj EBITDA $14b (pro forma 2020: rev 39b, EBITDA 12b)
• AT&T adjusts guidance pro-forma
• Rev CAGR LSD, adj EBITDA CAGR MSD, adj EPS CAGR MSD
• Annual capex $24b (to expand 5G to 200m pops YE 2023, FTTH to 30m premises YE 2025)
• Annual dividend payout ratio 40-43% on anticipated FCF of over $20b
• Leverage 2.6x at closing, <2.5x YE 2023

WarnerMedia - Discovery merger implications

Bloomberg reported of a merger of AT&T's WarnerMedia with Discovery.

• Combines broadcast (linear channels) and D2C (streaming), as well as premium content (HBO) with low-end (reality). Also, WarnerMedia is big in factual as well (CNN, providing a solid add-on for Discovery's portfolio) and Discovery adds sports (Eurosport, adding weight to HBO).
• Deal structure, management unclear as yet.
• Verizon selling Verizon Media, AT&T spinning of WarnerMedia raises the question: what about the other telco/media marriages? (Comcast, Telenet, Telia)
• Consolidation: in a crowded market (streaming) where 'stacking' is a big unknown, combining two entities is a good thing. They lose some focus (in terms of brand image) but gain portfolio breadth and scale. After all, we are still seeing newcomers in the D2C space and some even produce 'oroginals' (which is pointless if you don't have a sizeable budget - people will simply churn after seeing the exclusives).
• Pricing: adding the individual prices for HBO Max ($15) and discovery+ ($7) results in too high a price for many, given competitor pricing and the stacking issue. They may need to focus on volume (market share) rather than price.

AT&T Analyst Day: Strategy Update & 5G Strategy

Analyst Day: Strategy Update & 5G Strategy, Presentation

• HBO expansion
• HBO Max AVOD tier to launch June 2021 (has $80m in ad bookings), will not include 2021 theatrical releases, HBO original series will not have ads inside
• raises subs targets HBO/HBO Max (excl free trials, Cinemax) to 120-150m YE 2025 (from 75-90), 67-70m YE 2021 (61m YE 2020 o/w 41.5m in US)
• HBO rev target $15b in 2025 (2020: $6.8b), HBO Max investements peak in 2022, break-even in 2025
• HBO Max to expand to 60 new markets in 2021 (39 in Latam June, 21 in Europe H2)
• no plans to add live sports to HBO Max in 2021
• target HBO Max ARPU $12 in 2021, $14 in 2025 (2020: $11.7)
• FTTP expansion
• to add 3m lines in >90 metro areas in 2021 (current BB coverage 52.97m HH o/w 14.93m on FTTH, 22.6m on FTTN/VDSL, 13.9m on ADSL)
• 70% of FTTH gross adds are new to AT&T
• C-band spectrum (80 MHz in 3.7-4.2 GHz band)
• acquired for $27.4b (o/w $23b payable in 2021)
• deployment from 2021 (40 MHz), associated capex $6-8b (mostly 2022-24)
• current 5G coverage 230m pops in 14k cities, 5G+ (mmWave) in 38 cities
• 5G key areas
• Sports & venues (5G+ in new 17 venues YE 2021, total >40; interactive experiences, holographic capabilities)
• Entertainment Retail (5G+ at >30 locations; from immersive AR experiences to IoT integrations) & Gaming (low latency 5G+, unique streaming opportunities, cloud gaming, plans gaming alliances)
• Travel & transportation (5G+ at 7 new airports YE 2021, autonomous vehicles, connected trains)
• Business transformation (complement business fiber with FWA with Sierra Wireless and Cradlepoint routers; universities, healthcare incl AR & VR; MEC for Private 5G, autonomous drones, video AI, synchronous media collaboration, connected vehicles)
• Security & public safety
• Guidance 2021 unchanged
• rev growth 1% (wireless SR 2%)
• adj EPS stable
• gross capital investment $21b (capex $18b)
• FCF $26b
• div $15b (pay-out ratio high 50s)
• leverage target YE 2021 3.0x (incl $6b debt increase for C-band spectrum), by 2024 2.5x
• Expected business trends
• wireless EBITDA growth from share gains, customer growth, adoption of unlimited plans
• increased fiber penetration
• business wireline margin improvement from portfolio simplification
• WarnerMedia improvements (HBO Max scales, ad improvements, cost savings from restructuring)
• AT&T Latam improvements (customer growth, expense mgt)
• Other
• current data usage average (GB/line/mo) over fixed 280 down, 39 up, fixed 318 (CAGR 2015-2020 38%), wireless 5.6 (CAGR 35%)
• current spectrum 72 MHz low-band, 173 MHz midband, 1040 MHz mmWave
• current FTTH ARPU $58

HBO Max: all the specs

Launch date:

• May 2020

Content:

• focus on 3 areas
• kids/family
• millennials/Gen-Z
• adults (focus on women)
• new series rolled out one episode at a time
• total 10k hr at launch o/w 1800 films, incl
• originals (31 series in 2020, 50 in 2021)
• library content from Warner Bros, New Line, DC, CNN, TNT, TBS, truTV, Turner Classic Movies, Cartoon Network, Adult Swim, Crunchyroll, Rooster Teeth, Looney Tunes etc
• 3rd-party licensed content
• to add live special events

Pricing:

• 15 $/mo
• free for 10m existing AT&T HBO subs & HBO Now direct-billed subs
• plans new bundles with free HBO Max for premium video, mobile, BB subs (total 170m D2C relationships, 5500 retail stores)
• to add AVOD tier within 1 yr (with added content)

Tools:

• personalised profiles & homepages
• curated recommendations
• co-viewing (shared homepages separate from personal homepages)
• parental PINs
• downloads for offline viewing

Targets:

• 75-90m subs in Americas & Europe YE 2025 o/w 50m in US
• incremental investment $1.5-2.0b in 2020 (for new content, foregone licensing revenue of own content, operating expense for the technology platform, marketing)