Morgan Stanley has taken a bullish stance on AT&T stock (T -0.7%), with a catalyst-driven take that the upcoming spin-off of its shares for the Warner Bros. Discovery deal will unlock value in communications.
The update comes ahead of AT&T's investor day on March 11, where some additional details are expected on AT&T's Communications business going forward. Discovery's shareholder vote on the deal comes that day as well.
AT&T and Discovery (DISCA -4.6%) have set expectations that they can close the $43 billion deal in mid- to late April.
AT&T investors will receive about 0.24 shares in Warner Bros. Discovery ("New Discovery") on closing; those shares are currently worth about $6.75 per AT&T share, leaving an implied "RemainCo" price for AT&T of $16.78, Morgan Stanley's Simon Flannery notes.
It also would have an ongoing dividend of $1.11/share, implying a pro forma yield of 6.6%, among the highest in the entire S&P 500.
There are three potential outcomes for the spin-off/merger event, Flannery says. In the first, upside scenario, confidence builds around the sustainability of top-line growth and free cash flow/leverage perspectives, and the stock benefits from re-rating. There's a 20% chance for that outcome, the firm says, and the RemainCo would rally to a stub stock price of $20 (14% upside) with a 5.5% dividend yield.
There's a 50% chance of a more midline outcome: that completing the spin and updating guidance removes some overhang, driving some incremental buying from investors reluctant to buy today, as they don't want new Discovery shares (notably, income investors). That implies an $18.50 stock price, for 7% upside in RemainCo, Morgan Stanley says.
The remaining 30% chance is that investor sentiment is dominated by skepticism about long-term prospects in areas such as wireless competition, achievability of free cash flow, deleveraging and other targets. That outcome implies a RemainCo price of $16.25, or 2% downside, the firm says.
Its base case is most like the middle scenario, Flannery writes. But the firm has a current $28 12-month price target on AT&T, implying 18% upside, and an Overweight rating. (That target equates to a $21.25 price on the remaining AT&T business, vs. an implied $16.78 today.)
This week, news broke that the WarnerMedia is charging ahead with its plans to launch streaming news service CNN+ by the end of the month, with a long-term price of $5.99/month.