DISCA/DISCK - Discovery Communications

[Mephistopheles]

On 5/17/2021 at 4:33 PM, peridotcapital said:

proforma share count will be around 2.26 billion.

I'm getting slightly more at 2.48 billion - still seems like a good deal at <9x '23 FCF

The A1 Preferreds are going to get converted at a ratio of 13.11 common per pref. They have 8 million outstanding which turns to about 105 million pro forma.

The C1 converstion ratio is 19.4 x 5 million shares = 97 million pro forma

So:

DISCA = 168,654,015

DISCB = 6,512,378

DISCK = 330,146,263

A1 = 104,907,705

C1 = 96,824,000

Share Awards = 11,000,000

Total = 718,044,361

NewCo = 2,476,015,039

[Spekulatius]

7 hours ago, wabuffo said:

why didn’t DISCA raise some funds with a secondary like VIAC did early this year? 
I think they were in negotiations with T and couldn’t do a secondary without disclosing the MNPI.  Knowing Malone, the overvalued Discovery stock would’ve been an extra motivation to pursue the merger.  It will be interesting to read the proxy on the deal to see how both sides dealt with/reacted to the sharp drop in price after Archegos blew up in the middle of their negotiations.

wabuffo

@wabuffoIf this is true, how come that some insiders were able to unload shares during this time:

http://www.openinsider.com/screener?s=DISCA&o=&pl=&ph=&ll=&lh=&fd=730&fdr=&td=0&tdr=&fdlyl=&fdlyh=&daysago=&xp=1&xs=1&vl=&vh=&ocl=&och=&sic1=-1&sicl=100&sich=9999&grp=0&nfl=&nfh=&nil=&nih=&nol=&noh=&v2l=&v2h=&oc2l=&oc2h=&sortcol=0&cnt=100&page=1

 

I agree, reading the merger docs, timelines and negotiations will be interesting.

 

on my sh$itco accustom, I think the poker table analogy is very relevant here. TV/ cable used to be a clubby business, but now the real competition is Netflix, Google, the new Disney, Facebook which are all in the advertising and content business and play a different metagame.

What used to be good business can become a lousy business if younger was more competition that sets the rules now. Bulking up size only helps so much when the rules of the game change.

We will see how this goes. I am open to change my mind if I get a better view where this is heading. I think there is no rush to get involved, because this merger is going to be messy and there are a lot of sellers for this stock, the way the deal is structured.

[vince]

7 minutes ago, Spekulatius said:

@wabuffoIf this is true, how come that some insiders were able to unload shares during this time:

http://www.openinsider.com/screener?s=DISCA&o=&pl=&ph=&ll=&lh=&fd=730&fdr=&td=0&tdr=&fdlyl=&fdlyh=&daysago=&xp=1&xs=1&vl=&vh=&ocl=&och=&sic1=-1&sicl=100&sich=9999&grp=0&nfl=&nfh=&nil=&nih=&nol=&noh=&v2l=&v2h=&oc2l=&oc2h=&sortcol=0&cnt=100&page=1

 

I agree, reading the merger docs, timelines and negotiations will be interesting.

 

on my sh$itco accustom, I think the poker table analogy is very relevant here. TV/ cable used to be a clubby business, but now the real competition is Netflix, Google, the new Disney, Facebook which are all in the advertising and content business and play a different metagame.

What used to be good business can become a lousy business if younger was more competition that sets the rules now. Bulking up size only helps so much when the rules of the game change.

We will see how this goes. I am open to change my mind if I get a better view where this is heading. I think there is no rush to get involved, because this merger is going to be messy and there are a lot of sellers for this stock, the way the deal is structured.

 I don't disagree with anything in this post, no doubt the game has changed.  It's not black or white, NOBODY knows how this will play out and the market will eventually value the entities appropriately.  I simply stated that its my observation that the multiple is too low ( has been for years) and implies a more negative future than what I see as likely

[adhital]

someone criticized revenue multiple valuation as too simple.. at the end of the day, revenue is what matters; however, I’ll welcome another criticism

Buying disca at the current price is like paying ~4x adj ebitda for newco. T bought TW for around ~10x.  Netflix is selling at ~12x 2021 ebitda. TW was selling for ~8x ebitda when it was bought by T

I don’t mean that this is the only parameter to look for and jump in. 

[LearningMachine]

3 hours ago, Mephistopheles said:

I'm getting slightly more at 2.48 billion - still seems like a good deal at <9x '23 FCF

The A1 Preferreds are going to get converted at a ratio of 13.11 common per pref. They have 8 million outstanding which turns to about 105 million pro forma.

The C1 converstion ratio is 19.4 x 5 million shares = 97 million pro forma

So:

DISCA = 168,654,015

DISCB = 6,512,378

DISCK = 330,146,263

A1 = 104,907,705

C1 = 96,824,000

Share Awards = 11,000,000

Total = 718,044,361

NewCo = 2,476,015,039

Thanks @Mephistopheles.  Which SEC filing did you find the 13.11 multiple in? 

Looks like I was incorrectly using 677,312,656 share-count above instead of 718,044,361 shares. 

[LearningMachine]

On 5/19/2021 at 5:53 PM, LearningMachine said:

Hi Vince, would it be possible to share your math on trading under 10x current earning power so that I could compare notes? 

Here is how I am approaching it for the combined entity assuming their adjusted EBITDA numbers are correct:

• Enterprise Value of 10X Adjusted EBITDA of $12B = $120B
• Debt of 5X Adjusted EBITDA of $12B = $60B
• Current total Equity of combined entity = $120B - $60B = $60B
• 29% owned by Discovery Shareholders = $17.4B
• Total DISCK shares assuming all DISCA and DISCB shares will be converted 1:1 to DISCK shares at ZERO premium: 677,312,656
• Current Value per DISCK share = $17.4B/677,312,656 = $25.69

Did I screw up somewhere? :-).

Share type	#shares as of March 31-April 16, 2021
DISCA	168,654,015
DISCB	6,512,378
DISCK	330,146,263
Impact of assumed preferred stock conversion	161,000,000
Dilutive effect of share-based awards	11,000,000
Total Shares	677,312,656

 

 

Also, what do you think about the believability of their revenue growing from current $39B to $52B Revenue by 2023E, that is 33% growth, given the current Revenue split & history as follows:

 

 

Also, what's the deal with low termination fees of $720M for AT&T.  Is AT&T trying to see if someone could offer AT&T a higher price for WarnerMedia plus miniscule termination fee? 

Using corrected share count of 718,044,361 shares Value per share at 10X EBITDA = $17.4B/718,044,361= $24.23/share.

 

[LearningMachine]

54 minutes ago, adhital said:

Buying disca at the current price is like paying ~4x adj ebitda for newco. 

@adhital, would it be possible to share your math on how you're getting ~4x adj abitda?

At 10x adjusted EBITDA multiple, which in hindsight was probably too generous of a multiple for valuing this business, I got value of $24.23 per share above, lower than $29.10 closing price.

Edited May 23, 2021 by LearningMachine

[Mephistopheles]

37 minutes ago, LearningMachine said:

Thanks @Mephistopheles.  Which SEC filing did you find the 13.11 multiple in? 

Looks like I was incorrectly using 677,312,656 share-count above instead of 718,044,361 shares. 

There you go:

https://www.sec.gov/Archives/edgar/data/0001437107/000119312521167840/d68084d425.htm

" each issued and outstanding share of Discovery’s Series A-1 Convertible Participating Preferred Stock, par value $0.01 per share, will be reclassified and converted into 13.11346315 shares of Discovery New Series A Common Stock "

[adhital]

2 hours ago, LearningMachine said:

@adhital, would it be possible to share your math on how you're getting ~4x adj abitda?

At 10x adjusted EBITDA multiple, which in hindsight was probably too generous of a multiple for valuing this business, I got value of $24.23 per share above, lower than $29.10 closing price.

@LearningMachine It was a simple math but I may of way off here  so please correct me. 

"Upon consummation of the Merger, existing shareholders of Discovery will own approximately 29% of the outstanding shares of Discovery on a fully diluted basis (computed using the treasury stock method)."

"~$52B of expected revenue and ~$14B of expected adjusted EBITDA in 2023"

newco 2023 adj ebitda = $14B. 29% belongs to the current shareholder ~$4B or current discovery is selling at (based on $32/share) ~4x of $4B

Capital structure and cost accounting for contents (amortization schedule of content license vs original shows , vs opex spending on cable etc.) are different for TW, DISC, Netflix. ebitda comparison is not ideal but still valuable IMO

Edited May 23, 2021 by adhital

[Broeb22]

5 hours ago, Spekulatius said:

on my sh$itco accustom, I think the poker table analogy is very relevant here. TV/ cable used to be a clubby business, but now the real competition is Netflix, Google, the new Disney, Facebook which are all in the advertising and content business and play a different metagame.

The media business has often been a frenemy type business. TW/D get revenue from YouTube TV today, as does Disney. Amazon Video sells a lot of other studios’ movies/shows, including some Warner Bros. has backed. 

I do believe like Vince does that this proposed acquisition changes the game for Discovery in a big way. They will still be a small fish relative to the others in the DTC streaming sea, but their chances of survival and even thrival(? Haha) long term just went up significantly. 
 

With that said, John Malone has never had a reputation for spending huge dollars, and despite Zaslav’s multiple apartments in the same city, Discoveey has never tried to spend big on content. So there is a learning curve there that the Discovery team will have to endure as they try to build massive hit shows (I can’t see why they would acquire TW if they were not going to try). Additionally Discovery will have way more debt than any of their major competitors, so they are somewhat more limited in how flexible they will be between leaning into content investment vs. paying off debt, which I view as a slight negative to the growth of the business. That negative is offset by the potential for leveraged returns that come with that level of debt and potentially strong organic growth.

Finally, on the post-spin dynamics, I don’t think this will be as beaten up as some people think. I have participated in past RMTs (CBS radio and Entercom comes to mind) where everyone said there is this massive overhang that will cause the stock to sell off unnaturally. Well that didn’t really happen because of the dynamics of RMTs, to my disappointment at the time. We’ll have to see what the specific language is but I believe T shareholders will have the option to take Discovery stock or T stock. T stock is stable enough I’d bet that arbitragers will not make the post-spin dynamics as juicy here by isolating the value of the Discovery stub within T’s stock price. Just my 2 cents as someone who believes in and has profited from spin dynamics in general. I’ve just found RMTs are kind of an exception.

[LearningMachine]

5 hours ago, adhital said:

@LearningMachine It was a simple math but I may of way off here  so please correct me. 

"Upon consummation of the Merger, existing shareholders of Discovery will own approximately 29% of the outstanding shares of Discovery on a fully diluted basis (computed using the treasury stock method)."

"~$52B of expected revenue and ~$14B of expected adjusted EBITDA in 2023"

newco 2023 adj ebitda = $14B. 29% belongs to the current shareholder ~$4B or current discovery is selling at (based on $32/share) ~4x of $4B

Capital structure and cost accounting for contents (amortization schedule of content license vs original shows , vs opex spending on cable etc.) are different for TW, DISC, Netflix. ebitda comparison is not ideal but still valuable IMO

Today's market cap and EV:

Current market cap = 718,044,361 shares * $29.10/share = $20.90B

29% share of $60B debt in combined entity = $17.4B

Today's Enterprise Value (EV) owned by Discovery shareholders = $20.90B + $17.4B = $38.3B

What you might be trying to calculate:

Today's EV/2023E adjusted EBITDA = $38.3B/$4B = 9.575X, assuming you believe their EBITDA numbers and you believe they will be able to grow their EBITDA from $12B to $14B.

Expected multiple at 2023E at today's stock price:

29% share of $42B expected debt at 2023E = $12.18B

EV at 2023E if no change in stock price = $20.90B + $12.18B = $33.08B

2023E EV/2023E adjusted EBITDA = $33.08B/$4B = 8.27X at 2023E

Actual multiple today:

29% of $12B combined proforma EBITDA today = $3.48B

Today's EV/29% share of adjusted proforma EBITDA today = $38.3B/$3.48B = 11.0X

Edited May 24, 2021 by LearningMachine

[adhital]

1 hour ago, LearningMachine said:

Today's market cap and EV:

Current market cap = 718,044,361 shares * $29.10/share = $20.90B

29% share of $60B debt in combined entity = $17.4B

Today's Enterprise Value (EV) owned by Discovery shareholders = $20.90B + $17.4B = $38.3B

What you might be trying to calculate:

Today's EV/2023E adjusted EBITDA = $38.3B/$4B = 9.575X, assuming you believe their EBITDA numbers and you believe they will be able to grow their EBITDA from $12B to $14B.

Expected multiple at 2023E at today's stock price:

29% share of $42B expected debt at 2023E = $12.18B

EV at 2023E if no change in stock price = $20.90B + $12.18B = $33.08B

2023E EV/2023E adjusted EBITDA = $33.08B/$4B = 8.27X at 2023E

Actual multiple today:

29% of $12B combined proforma EBITDA today = $3.48B

Today's EV/29% share of adjusted proforma EBITDA today = $38.3B/$3.48B = 11.0X

good catch. I was comparing EBITDA against equity vs EV like you're doing. but yes, I need to add additional pref conversions and the ratio becomes 6 at today's EBIDTA, still below comps but not as cheap as I thought. 

ATT paid 12.6x 2016EBITDA for TW . In comparison, Netflix EV is  14xEBTIDA I think...and we're paying 11x for newco. Doesn't looks like a bargain but need to dig deeper into accounting for a precise EV/EBITDA comparison. 

(I think  you may need to take out cash and cash equivalent to get precise EV but I don't think it matters much though)

 

[Bluffy]

2 hours ago, LearningMachine said:

Today's market cap and EV:

Current market cap = 718,044,361 shares * $29.10/share = $20.90B

29% share of $60B debt in combined entity = $17.4B

Today's Enterprise Value (EV) owned by Discovery shareholders = $20.90B + $17.4B = $38.3B

What you might be trying to calculate:

Today's EV/2023E adjusted EBITDA = $38.3B/$4B = 9.575X, assuming you believe their EBITDA numbers and you believe they will be able to grow their EBITDA from $12B to $14B.

Expected multiple at 2023E at today's stock price:

29% share of $42B expected debt at 2023E = $12.18B

EV at 2023E if no change in stock price = $20.90B + $12.18B = $33.08B

2023E EV/2023E adjusted EBITDA = $33.08B/$4B = 8.27X at 2023E

Actual multiple today:

29% of $12B combined proforma EBITDA today = $3.48B

Today's EV/29% share of adjusted proforma EBITDA today = $38.3B/$3.48B = 11.0X

Isn´t it more likely that NewCo ends up with around $58 B in debt as Discovery has $15B in debt outstanding and they want to issue $43 B in additional debt for the new company? Even though it does not move the needle in a big way.

Other questions I would have is what happens with the cash the companies generate until closing and what could be steady state margins? I believe the 2023 proforma EBITDA of $14 B does not bake in the significant synergies (that get likely reinvested into content production). 

[LearningMachine]

1 hour ago, Bluffy said:

Isn´t it more likely that NewCo ends up with around $58 B in debt as Discovery has $15B in debt outstanding and they want to issue $43 B in additional debt for the new company? Even though it does not move the needle in a big way.

Other questions I would have is what happens with the cash the companies generate until closing and what could be steady state margins? I believe the 2023 proforma EBITDA of $14 B does not bake in the significant synergies (that get likely reinvested into content production). 

$14B "[i]ncludes phase-in of synergies assuming mid-2022 closing".  See slide 11 at https://s27.q4cdn.com/187472364/files/doc_presentations/2021/ATT-Discovery-WM-05172021-FINAL.pdf.  Don't know how much of the claims of 100 million to 400 million streaming users it includes.  It does include claim of revenue growth from $39B to $52B, i.e. 33% revenue growth.  You can see their history of revenue growth/decline I shared above to see if that 33% growth by 2023 is believable. $52 Billion Revenue claim includes claim of getting $15+ Billion of DTC revenue, and revenue from non-DTC of $37B.  $15 Billion DTC revenue across 100 million streaming users would require streaming revenue from each user of $150 per year, i.e. $12.50 per month.

$60B debt is based on "~5x" adjusted EBITDA at closing.  See Id. 

Edited May 24, 2021 by LearningMachine

[Spekulatius]

4 hours ago, adhital said:

good catch. I was comparing EBITDA against equity vs EV like you're doing. but yes, I need to add additional pref conversions and the ratio becomes 6 at today's EBIDTA, still below comps but not as cheap as I thought. 

ATT paid 12.6x 2016EBITDA for TW . In comparison, Netflix EV is  14xEBTIDA I think...and we're paying 11x for newco. Doesn't looks like a bargain but need to dig deeper into accounting for a precise EV/EBITDA comparison. 

(I think  you may need to take out cash and cash equivalent to get precise EV but I don't think it matters much though)

 

If Netflix were trading at 14x EBITDA, I would buy the stock hand over fist. As it stands, Netflix trades at ~8x 2022 revenues and ~33x EBITDA.

[wabuffo]

The big man (John Malone) is on CNBC at 9am today.   I'm sure the merger will be a big topic of discussion.

wabuffo

[vince]

This is what Malone had to say today and he had commented a couple years ago about the difficulty that HBO faced in acquiring global scale......  “For me, the problem with HBO Max is it had no ability to go international at the time. The combination with Discovery, given Discovery’s existing presence, large presence in 200 countries around the world with a great brand, ... to me, that’s the great upside,” said the cable TV pioneer and longtime chairman of Liberty Media........Since that time I have been thinking long and hard about the global aspects of the industry and Discovery in particular.  Without Warner I had come to the conclusion that Discovery as a whole had a long stretch of moderate (at least) growth because of their international opportunity.  In fact, their international linear business was offsetting whatever challenges their domestic business were having.  And Discovery plus (domestic and international) would almost certainly provide good growth and so far we have some proof that this is the case.  I can't imagine that Warner makes that case worse off.  And remember this combination is trading at 10 times fcf pro forma.  Something else that kind of rings my bell is Discovery has an offering that has low churn characteristics.  HBO has strong customer acquisition content (blockbuster films that they can use to entice customers to sign up). Thinking these things thru is very interesting.

[adhital]

5 hours ago, Spekulatius said:

If Netflix were trading at 14x EBITDA, I would buy the stock hand over fist. As it stands, Netflix trades at ~8x 2022 revenues and ~33x EBITDA.

(I think this should go to Netflix thread.. apologies to COBF members) 

@SpekulatiusIs it 33x EBIDTA against a market cap (equity) Or, EV to EBITDA? I got the original number from Interactive broker's ratio value for Netflix. 

Just for fun, I spend 15 min using https://s22.q4cdn.com/959853165/files/doc_financials/2021/q1/Q1'21-Website-Financials.xlsx, but please correct me if not the case as LM helped me on the DISC data

Total Diluted share count 455mm. market cap 455 * $504/share = $229 B
EV = $229 + $15 - $9 = $235B.

LTM: EBITDA = $3.73 (Net Income) + $11 (Amortization of content assets) + $1.58 (Depreciation, Interest and Taxes) = $16 B

EV/EBITDA = 235/16 = 14.68

The heavy item here is the amortization of content assets. It is $11B LTM as most of the content is licensed and amortized, unlike TW or DISC original contents spending. This is why EBITDA comparison may not be of much help

[dwy000]

2 hours ago, adhital said:

(I think this should go to Netflix thread.. apologies to COBF members) 

@SpekulatiusIs it 33x EBIDTA against a market cap (equity) Or, EV to EBITDA? I got the original number from Interactive broker's ratio value for Netflix. 

Just for fun, I spend 15 min using https://s22.q4cdn.com/959853165/files/doc_financials/2021/q1/Q1'21-Website-Financials.xlsx, but please correct me if not the case as LM helped me on the DISC data

Total Diluted share count 455mm. market cap 455 * $504/share = $229 B
EV = $229 + $15 - $9 = $235B.

LTM: EBITDA = $3.73 (Net Income) + $11 (Amortization of content assets) + $1.58 (Depreciation, Interest and Taxes) = $16 B

EV/EBITDA = 235/16 = 14.68

The heavy item here is the amortization of content assets. It is $11B LTM as most of the content is licensed and amortized, unlike TW or DISC original contents spending. This is why EBITDA comparison may not be of much help

If you add back the content amortization, you need to subtract content spend.  

[adhital]

well.. we've another comp for fun! 

"Amazon.com Inc. AMZN 1.54% is nearing a deal to buy the Hollywood studio MGM Holdings for almost $9 billion"

= 9x 2020 Rev or. 65xEBIDTA

https://www.wsj.com/articles/amazon-nears-deal-to-buy-hollywood-studio-mgm-11621880759?mod=hp_lead_pos1

[adhital]

3 minutes ago, dwy000 said:

If you add back the content amortization, you need to subtract content spend.  

why so, if I may ask?  ebitda is coming out straight from income statement. They capitalize content spend once and now expensing (or depreciating) it for some number of years.  but yes, to compare apples to apples across content producers vs. content purchaser is to adjust the accounting.  such as, capitalizing content related expenses for producers as well.  Looks like EBIDTA margin is 30% for newco vs. 60% for netflix, perhaps for the same reason. 

[dwy000]

29 minutes ago, adhital said:

why so, if I may ask?  ebitda is coming out straight from income statement. They capitalize content spend once and now expensing (or depreciating) it for some number of years.  but yes, to compare apples to apples across content producers vs. content purchaser is to adjust the accounting.  such as, capitalizing content related expenses for producers as well.  Looks like EBIDTA margin is 30% for newco vs. 60% for netflix, perhaps for the same reason. 

In media, content spend isn't the same category as capex when looking at a traditional EBITDA.   Content spend is effectively your cost of goods sold.  It gets capitalized and amortized because of the lead time for production vs. when it get broadcast.  If you exclude it altogether you are effectively excluding all COGS and your EBITDA is going be artificially (way, way) too high.

If you are trying to calculate the earnings power of the business and the operating earnings/cash flow then you really need to include content spend.  Whether you do it using amortization number or the cash number is up to you but looking at the business without accounting for the product that people are paying for would make the analysis flawed.

Edited May 24, 2021 by dwy000

[CorpRaider]

If it's NFLX content, it should definitely be immediately expensed.  

[changegonnacome]

6m42s in Mario does some merger math on DISC & T........suggests 50% upside in there somewhere but not quite yet...........folks in this thread have done some great work on the pro-forma valuation . Would be great if someone could parse Mario's math and explain it to me as you would to a labrador   Joking aside I'd appreciate it