Discovery Shares Rally, Wall Street Warms To Upcoming WarnerMedia Deal – Report Door

Discovery stock jumped today as a formerly skeptical Wall Street is increasingly out pounding the table for the stock ahead of the David Zaslav-led company’s merger with WarnerMedia.

The shares topped $30 during the session before closing at $29.34, up 2%. The upswing continued a rally that started last week on an upgraded ‘buy’ rating from BofA Securities and others weighing in. BofA analyst Jessica Reif Ehrlich said then, “We believe Warner Bros. Discovery has the potential to be the most dynamic global media company.” That helped the shares jump 20%. Today, in a follow-up note titled “Stage is set and the show is about to start,” she boosted her fourth-quarter revenue, free cash flow and EPS estimates and said she’s encouraged by operational momentum heading into the merger.

Also today, UBS analyst John Hodulik anticipated a clean close to Discovery’s deal with AT&T early in the second quarter. In a note focused on the pending transaction, Hodulik said he expects Discovery to rapidly de-lever after as it focuses on continued growth at HBO Max.

It’s better late than never for Discovery, as analysts and investors were slow to embrace the deal announced last May. Transformational as it was, the news did not stem the stock’s downward trajectory. Shares had already started to drop from their 52-week high near $80 in March and continued to hit a low of under $22 in mid-December. So $29.34 (where the shares ended up closing today) isn’t exactly meme stock territory, although some on Reddit noted that owning WarnerMedia doesn’t seem to be priced into Discovery shares. The combined company could also be an acquisition target itself in an era of rapid consolidation.

BofA has a $45 price target on Discovery. Hodulik says the deal should be a catalyst for the shares.

In part, Wall Street may have had jitters about the deal closing, Those may have been allayed over the past month by a handful of headlines including unconditional clearance by the European Union, a favorable private letter ruling from the IRS on tax treatment and particularly upbeat comments by AT&T CEO John Stankey at a recent media conference. Given all that, it seems the merger will likely get its greenlight from the DOJ by mid-year as anticipated. (The deal also requires nods from a few other regulators overseas and a yes vote by Discovery shareholders, which isn’t likely to be a problem with big holders John Malone and Advance/Newhouse onboard.)

Stankey said that DOJ approval could “accelerate and happen earlier.” (It could also slip, he added, “But I see nothing going on in that, that causes me any concern.”)

“You saw that the EU cleared this without any concerns. I would say that if you think about the company’s holdings in the EU versus elsewhere in the world, there shouldn’t be anything that jumps out that says, ‘Gosh, there should be something hiding there that’s going to be a problem.’”

Other positive news includes WarnerMedia’s reveal that HBO/HBO Max had exceeded goals, ending last year with nearly 74 million (73.8M) subscribers, compared with official guidance to 70-73 million subs.

And Discovery had a victory in Poland in late December when the president there vetoed legislation that would have forced it to divest a key asset, Poland’s largest private television network, TVN.

The pressing question is the merged company’s go-to-market strategy for DTC. Reif Ehrlich and others expect it will eventually migrate HBO Max and Discovery+ to a combined platform, “optimizing the broad appeal of their complimentary content mix to boost engagement and minimize churn.” She said the combined library “also creates the potential to create a FAST service [free ad-supported] similar to Pluto and Tubi in order to increase the TAM [total available market] and capture incremental subscribers.”

Discovery can’t announce all that much before its approvals are in place. It has said it anticipates cost synergies from the merger of $3 billion, which Reif Ehrlich calls “highly achievable, if not conservative, given the several areas of duplicative expenses (e.g. tech, ad/distribution sales force etc.).” The deal, in fact, is expected to result in deep staff cuts.

Before that, another question is how AT&T technically plans to unload WarnerMedia. It hasn’t said yet if it favors a split or a spinoff. Hodulik thinks the telco is leaning towards a split – or AT&T shareholders exchanging their old AT&T shares for a combination of shares in the new, leaner AT&T and Warner Bros. Discovery, with shareholders able to determine their exposure to WBD.

More details could be forthcoming when AT&T announces fourth-quarter earnings on January 26. Discovery will report its next quarterly numbers sometime in February.