Entering text into the input field will update the search result below

Discovery Is A Strong Buy Thanks To Merger With WarnerMedia

Aug. 03, 2021 4:06 PM ETWarner Bros. Discovery, Inc. (WBD)DIS, NFLX, T71 Comments
WideAlpha profile picture


  • Discovery is currently trading at a low free cash flow multiple due to concerns of cable subscriber losses.
  • The merger with WarnerMedia will give the company enough critical mass of media content to compete with Netflix and Disney in the direct-to-consumer space via Discovery+ and HBO Max.
  • The company is trading below our estimated fair value per share.
Discovery Times Square Marquee New York City
wdstock/iStock Editorial via Getty Images

Discovery Inc. (DISCK) and WarnerMedia are set to merge in order to better compete in the direct-to-consumer space dominated by Netflix (NFLX) and Disney+ (DIS). This combination creates one of the deepest content libraries in

This article was written by

WideAlpha profile picture
Fin-tech startup leveraging machine learning technology to discover investing opportunities and to generate growth-optimal portfolios. Publisher of the WideAlpha AI-Selected Index, which has markedly outperformed its benchmark.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of DISCK either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling shares, you should do your own research and reach your own conclusion, or consult a financial advisor. Investing includes risks, including loss of principal.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (71)

how did this work our for you?
DONTIGNY profile picture
DCF 42$...coincidentally the price I had sold my position...which I regreted a bit, given the HF pump thereafter.

A lot of faith in Discovery management team...

However, the number one metric shareholders should push is retention metric on HBO subscriptions.
That is not the math most people are using.
I don’t really understand investing in Discovery at this point. I think they’re a great property, but why would I buy a share of discovery for $24.90 which will get 29% of Warner Discovery when I could spend $25.60 a share for T which will get 71% of Warner Discovery plus have the share in T left over. Yes, we don’t know all of the details yet and how much ownership a shareholder with one share of each will get…but it seems to me that pretty much no matter how that shakes out, if you’re investing for the Warner Discovery transaction now, T is the better way to do it.
Historically , substantial Synergies are rarely achieved in any large merger. It seems more of a rationalization for Wall St to try to sell investors on the deal.

Streaming is becoming more crowded each year, which translates into lower pricing.

Although not at the levels of T or VZ , DIscovery will be among the most indebted of all companies; the market has concerns about this debt level in an environment of pricing pressure.

The decision to expand CNN flies in the face of lower news ratings and decreased credibility among news organizations in general. The market is interpreting doing so as more of an ego based decision instead of a financial based one
John Malone is elderly and is likely to be less involved in the company in the future.

T and Disca have managed to achieve what few other deals has done; it has destroyed the stock price of both .
Udith Fonseka profile picture
@r cohn i think your right and i cannot see the 3 billion a year in synergies even if their plans work out.
edithedon profile picture
@r cohn well i dont agree with you. It is about the content and there libery. They can sell there content over and over again becouse of it. Netflix will be in big trouble becouse if they dont produce amazing content they will start losing market shares which is already happening in US. Biggest risk is there execution. If they manage to do it, you will see huge FCF machine and huge stock price rise. Check how DISCA is managing there debt, pretty easy with that FCF, same will happen with merger. After DEBT is normalize, then you will see Cash cow.
@r cohn your point on CNN is reasonable.

Your point on pricing being at risk for streaming doesn't make sense to me. Two out of the three major players are raising prices (DIS & NFLX).

Your point on cost cuts could be true but from my experience cost saves are easier to achieve than revenue synergies and there appears to be an ample bucket of costs to at least achieve $2B of synergies . Duplicate US corporate overhead of $1B and international overhead of $1.5B. $6B of marketing/SG&A overhead. Duplicating US and international overhead gets you to almost half of the cost saves and the rest can be achieved through marketing and also elimination of technology spend given only one platform is needed.
Winnertakesall profile picture
I can't figure out why this is so cheap... I bought 1000 shares near the close today.
Udith Fonseka profile picture
@Winnertakesall are you fully taking into account all the debt that the new company will have and its prorata large market cap.?
Winnertakesall profile picture
@Udith Fonseka

Yes, but the cash flow easily covers the debt.
@Winnertakesall T said the same thing.
Largest new long position in Q2 for Michael Burry.
Buy cash flow generating companies with real earnings- real rates most likely will be negative forever.
@nauselstein Real rates will be negative forever? That is some forecast. I do think global liquidity will keep rates very low. As for the cash flow generating companies, I am 100% with you and long DISCK!
@southbeachguy42 is it tho ? Last time they went positive in early 2018 the whole world basically fell apart- how much more zombie debt have we created since then? We have backed ourselves into a corner. They are negative 110 bps right now- and much more negative than that in Europe - I think it’s an aggressive but totally sensible forecast.
@southbeachguy42 put it another way- to get to consistently positive real rates in this country- we’re gonna have to bust out a lot of bad debt and live thru some hard times. I don’t see the current population and culture ready to take that on. Can will be kicked as long as the metal is intact. Just my humble opinion.
Free cash flow looks great on both DISCK and T going forward, what the combination of the company will be on debt and free cash flow can not be pinned down yet. I still think the details when they come out will be favorable to everyone involved as synergies and better management become clearer.
edithedon profile picture
I see many of you here dont understand debt situation. Please go check again and check FCF.
Wow the hate still running hot on this board, hope that means a near term bottom on the stock.
Sabermetrics profile picture
Remind me to buy disca in 2024.
It could be same or even lower from current price.
@Nomad Capitalist if market tanks... sure.
Fiorenzo Arcadi profile picture
Gunnar Wiedenfels - Chief Financial Officer stated "As indicated, when we announced our transaction with WarnerMedia, we did not repurchase any shares during the quarter, as we continue to invest in our next-generation initiatives and conserve cash ahead of the closing of the deal" I really think the Board of Directors and Gunnar are showing weakness by not reinstating share repurchase program. Discovery can achieve equity financing if they show confidence in the assets they believe in.With the merger they will save 3 billion in synergies. Plus Discovery should convert under performing assets to cash. Discovery sold Great American Country network which contributed .09 cents towards earnings this quarter
edithedon profile picture
@Fiorenzo Arcadi i dont agree with you, they are saving cash on purpose if deal dont go they will BB shares, so buying DISCA at this moment with easy valuation and huge FCF is easy 50% upside. People think DISCA will go up just because of merger and if this doesn't happen it will be over and they dont see how much FCF they have.
@edithedon Why buyback shares rather than pay down debt? Interest expense is what sucks away cash flow.
edithedon profile picture
@Cantankerous Cat agree, but becouse of huge FCF they are reducing debt and BB shares. Right now they are holding cash for merger
Fiorenzo Arcadi profile picture
Magnolia Network is a risky asset. If the couple gets a divorce it becomes a useless asset. Reese Witherspoon as the actress and producer is selling the media company she founded to a newly formed company backed by private equity firm Blackstone Group.

Terms of the transaction were not disclosed, but The Wall Street Journal reported that the deal was worth about $900 million. A year ago Magnolia Network on youtube was getting an average of 1.2 million views, now barely 42,000 views. Cash is king, the CEO of Discovery should look after their shareholders, and unload Magnolia for a billion and reinstate share buybacks to reward long time shareholders. In my opinion, Discovery should get rid of non performing networks and convert it to cash. If the board of Directors of Discovery don't care about the shareholders, why should we care about them?
optomos profile picture
@Fiorenzo Arcadi Chip and Joanna have said that divorce is not an option. They stand a better chance of staying together than Bill & Melinda.
Fiorenzo Arcadi profile picture
@optomos I never laughed so hard, I think you are right about that. Chip and Joanna have five kids, in the future they may go for ten. I love growth. Eventually they should get their kids involved in the network. Remember, Oprah Winfrey produces over 30 shows for Discovery. Chip and Joanna have to produce more content, rather than having the couple dominating their network. Magnolia TV Network is all about Chip and Joanna. No growth and very little revenue for the parent company.
optomos profile picture
@Fiorenzo Arcadi Good point on their network. It will be interesting to see what they do on that point. I don't know if they could compete with Oprah, but if they get a few shows going they would stay relevant.
Longbow Archer profile picture
That's some eyepopping debt no? It would take about 19 years of Cash from Operations just to pay it off.
@Longbow Archer Agreed. $58 billion debt. And for a company who’s programming can be replicated by cash-rich companies like GOOG, AMZN, MSFT, or APPL. DISC is getting swindled. Obviously, ATT wants to shed some of its huge debt in the worst way. Perhaps the bondholders will make out well when the new DISC files for Chapter 11 in five years. Media is fickle. Interest rates will likely rise. Next generation eyeballs have a short attention span, and are moving to TicToc, and ever new forms of programming. An unpredictable cash flow will have to keep up with billions of dollars in yearly interest expense payments. Good luck for this dead duck.
@Longbow Archer 14 billion in EBITDA and 58 billion in debt… not sure what you are looking at. But a normal debt to ebitda is like 4x and this is right at that number- so they really don’t need to pay off any of it to remain reasonably leveraged.
Longbow Archer profile picture
@Patrick Longood I was looking at cash from operations.
No Disck is the best value in the batch. I also own Viac.
Is there a benefit to buying discovery rather than T? They’re priced about the same but don’t T share holders hold a larger portion of the new company? Plus you could benefit from the dividends til the merger takes over.
@Cubs34 interesting case, although you should be aware that there might be a chance that T will sink badly because many dividend investors will leave once the dividend is lowered. Besides, if you only focus on the new Warner media discovery company, why would you go for T if you only participate for a smaller part in the new media company, while discovery will allow you to go fully for the new Warner media discovery company.
Udith Fonseka profile picture
yeek---just too much debt in absolute terms. i think i will stick with VIAC
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.