Discovery: Warner Deal and Strong FCF Underappreciated by Market

Nick Appelo of Capco Asset Management presented his investment thesis on Discovery Communications (US: DISCA/DISCK) at Best Ideas 2022.

Thesis summary:

Discovery Communications is the leading producer of unscripted video content distributed through Pay-TV bundles in the US and internationally. Discovery also reaches consumers directly through their streaming app Discovery+.

The company is in the midst of an acquisition of WarnerMedia from AT&T which will expand their business to the Turner cable networks, Warner Bros TV and Film Studio, Warner Bros theatrical films, and the crown jewel — HBO and HBO Max. Together the two companies will have a comprehensive content library and deep trove of IP, the 2nd-largest global content budget, global distribution, 100+ million DTC subscribers, the world’s most renowned production studio, and the 2nd-leading global film franchise.

Despite such a strong hand in the changing media industry, the stock has performed poorly since the merger announcement as investors wait on the sidelines for deal approval and the potential technical overhang of a spin-off. This “deal purgatory” has left the PF market cap ~$65 billion despite line-of-sight to generate $10+ billion in FCF when all of the deal synergies have been realized.

At recent prices – the PF company might be able to generate ~80% of its market cap in FCF in the first 5-6 years after the merger. Discovery CEO David Zaslav and CFO and Gunnar Wiedenfels have an excellent track record of M&A execution and synergy realization in past deals with Scripps and Eurosport. Legendary media investor John Malone serves on the board of directors, and Discovery is ~10% of his public portfolio, his 3rd-largest position. With ample FCF in the hands of capable managers and under the guidance of a hall of fame capital allocator, the prospects for creating significant shareholder value in Warner Bros. Discovery are excellent.

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About the instructor:

Nick Appelo has been a Partner and Research Analyst at Capco Asset Management since 2019. Nick has been in the Financial services industry since 2017, and previously worked in investment banking at Evercore (2017 – 2019) where he advised telecommunications and technology companies on mergers & acquisitions.

Nick is a dual graduate of the University of Florida College of Business Administration (BS in Finance 2016, cum laude, and MS in Finance in 2017). At U.F. Nick was involved with the Gator Student Investment Fund where Will serves as a board member. Nick is also a board member for the Southern Scholarship Foundation, which provides free student housing to college students from low income backgrounds.

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