Months after Apollo’s $5 billion acquisition of Verizon Communications Inc.‘s (NYSE: VZ) media assets, AT&T’s (NYSE: T) separation of its own media assets appears to vindicate the thesis that telecoms are more valuable apart from their content creation arms. If so, the same logic could have financial sponsors sharpening pencils on other media and telecom hybrids that could demerge. Comcast’s (Nasdaq: CMCSA) NBCUniversal, anyone?
But first a recap of today’s deal. AT&T plans to spin off its content creation platform WarnerMedia and combine the unit with Discovery (Nasdaq: DISCA/B/K) in a deal that would see AT&T shareholders own 71% of the new company. Significantly, the parent company plans to offload debt onto the new subsidiary. The $43 billion paid in consideration to AT&T for the deal will be in the form of cash as well as debt WarnerMedia will retain at the subsidiary company level. AT&T also forecasts reaching a net debt to earnings before interest, depreciation and amortization (EBITDA) ratio of 2.5x by 2023, in part thanks to the divestiture. The move would help transform AT&T from its current status as the most heavily indebted nonfinancial company.
Debt reduction may not be as large of a driver for a Comcast separation in absolute terms, but could still be welcomed by shareholders. Comcast’s net debt to EBITDA ratio stands higher than AT&T’s at over 11x according to 1Q figures, and is still large in absolute terms at $93 billion.
Private equity could pitch Comcast on a transformation to a pure-play telecom company and still have room to add leverage if the AT&T transaction is any guide. Heavily indebted Discovery will assume additional liabilities for the deal. Could financial sponsors with entertainment portfolios make the case for operational synergies to make a transaction worthwhile?
Timing is also important here. Though AT&T acquired WarnerMedia through its $85 billion acquisition of Time Warner in 2018, the spin comes fresh off the heels of an April 22nd earnings beat where the unit’s profitability was healthy. A similarly good quarter for Comcast’s content business might bode well for an exit as well: Credit Suisse analysts raised EBITDA targets for NBCU after 1Q earnings.
Middle market PE could well see the AT&T deal as fodder for building content portfolios for a future exit. To be sure, NBCUniversal is massive. NBCUniversal generated 27 percent of Comcast’s 2020 revenues, or approximately $27 billion. At that size, the unit would be a large swing even for a club deal. But if the thesis of the Discovery and Verizon deals holds true, scale across content generation will become more important for dealmakers than vertical integration. That could drive buyer interest in content creators will an eye toward an exit.