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WarnerMedia is undervalued with a multiple like a ‘Cable Network Asset,’ AT&T chief says

AT&T CEO John Stankey said the decision to spin off WarnerMedia — and merge it with Discovery — came down to his belief that investors have undervalued the media division under the telco’s ownership.

About WarnerMedia, he said, “It’s trading right now like a cable network asset,” speaking Tuesday at the Goldman Sachs Communacopia Conference. Following the separation from AT&T, “we should start to see [WarnerMedia] valued in the same way as other direct-to-consumer businesses,” said Stankey, no doubt eyeing the relatively high price-to-earnings multiple of the likes of Netflix.

He acknowledged that “there’s uncertainty hanging in the stock right now,” including whether the WarnerMedia-Discovery deal will get regulatory approval and, if so, what the direct-to-consumer strategy of the combined media entity will look like.

Stankey felt WarnerMedia’s management was executing well on their strategy, but that AT&T needed to separate its communications and media businesses to maximize valuation and give investors a cleaner story. “I understood one of the things we needed to do was formulate a different investment thesis,” he said.

In May, AT&T and Discovery announced the proposed merger of WarnerMedia and Discovery. Under the terms of the pact, AT&T shareholders would hold 71% of the new company, while Discovery shareholders would own 29%. The new company also will assume debt carried by WarnerMedia. The deal is expected to close in mid-2022.

Under Stankey, AT&T has been unwinding the big entertainment strategy initiated by the telco’s former CEO, Randall Stephenson. DirecTV, which AT&T had acquired for almost $50 billion, completed the spinoff from AT&T last month.

“I feel like we’ve got the right platform in place right now,” Stankey said. “Next year we’re not going to be talking about restructuring. We’re not going to be talking about transactions. We’re going to be talking about how the management team has executed on a very focused strategy in a very lean and focused business in the best parts of the communications sector.”

Regarding the progress with HBO Max, Stankey said, “I think I can definitively say we’ve established a direct-to-consumer business that has a great future.”

As of the end of Q2, HBO and HBO Max had 47.0 million U.S. subscribers, up 29% year over year and a sequential net gain of 2.85 million. Globally, HBO/HBO Max had 67.5 million customers, up 12 million in past year.

WarnerMedia is expecting the end of HBO’s distribution on Amazon Prime Video Channels to cause its total domestic HBO/HBO Max sub base to take a hit in the third quarter. The company says its prior guidance for 70 million-73 million global HBO Max and HBO subscribers by the end of 2021 factors in the impact of HBO leaving Amazon Prime Channels. To try to help offset the loss of about 5 million HBO subs through Amazon Prime, WarnerMedia launched a short-term promo offering HBO Max at a 50% discount for six months. Variety

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