The merger of the legacy businesses at WarnerMedia and Discovery combined to form Warner Bros. Discovery (WBD); the new stock began trading on April 11th, reports Jim Osman, a leading specialist in spin-off and restructuring opportunities and the editor of The Edge Spinoff Report.
Warner Bros. Discovery has become the third largest streaming media powerhouse behind Netflix (NFLX) and Disney (DIS) — and operates with the following segments: Advertising, Distribution and Content Generation (together contributing 65% to revenues at $33.8 billion in FY23E) .
In addition, the fast-emerging Subscription (Direct to Consumer) business (contributing 35% to revenues at $18.2 bbillion in FY23E), contains such brands as Discovery, Food Channel, HGTV, TLC, Animal Planet, HBO, CNN, Cartoon Network, Adult Swim, Boomerang, Warner Bros., and many others.
We anticipate dividend-focused selling pressure. With ex-parent AT&T (T) paying a good dividend yield of 6.3% and a 1.5% stake (108m shares outstanding) being held by dividend focused funds, and with WBD not expected to pay any dividends in the near-term, we calculated close to 26m shares of selling to take place.
There have been nine Reverse Morris Trust (RMT) transactions over the past five years (2017-22), with a total of 18 companies resulting from these separations. Of those 18 companies, 11 were S&P 500 Index names, and examining their performance against the S&P 500 Index shows that the opportunities to gain outperformance to the Index typically fall within the first month, though that outperformance is a very slim 0.7% above the S&P 500 Index.
More importantly, investors made money on eight of the 11 names by the one-year mark with an average return of 18% (which jumps to a 33% total average return if the three companies that lost money are removed), indicating that while S&P 500 RMTs do not necessarily outperform the Index by the one-year mark, investors can still expect these transactions to result in positive returns around 72% of the time.
With WBD currently trading at a 7.4x FY23E EV/EBITDA, anything below the $22-$23 level appears to be a good entry point (slightly below 7.0x). We see potential upside in WBD of +34% (base case) & +50% (bull case). We recommending buying below the $23 level.
