Discovery shares, which have been in a funk for months, roared back to life today, jumping 17% on heavy trading volume after a validation from a veteran Wall Street analyst.
Bank of America’s Jessica Reif Ehrlich upgraded Discovery shares to a “buy” from “neutral” and rhapsodized about its potential in a note to clients. She also raised her 12-month price target to $45 from $34. The stock responded by climbing to $30.06 by the closing bell, its highest level since last July. Trading volume was nearly seven times normal levels.
On a mixed day overall for stocks, the boost for Discovery appeared to help ViacomCBS. As another TV heavyweight seen as an M&A candidate, it saw its shares rise 8% to $35.39.
Discovery and WarnerMedia are poised to combine in a $43 billion merger, forming a new entity to be led by current Discovery CEO David Zaslav. Speaking at a Citibank conference earlier this week, John Stankey indicated that the regulatory path was smooth for the deal and said it could close before the companies’ forecast of mid-2022. CNBC’s David Faber reported that his sources were telling him it could become official as soon as April.
Cost-savings and the potency of the merged company’s asset mix are the key reasons for Ehrlich’s optimism. “Under the right management—which we believe Warner Bros. Discovery has/will have—the combination of these highly complementary assets, has the potential to create a global media powerhouse driven by creative and content leadership,” the analyst wrote. “As a combined entity, we believe Warner Bros. Discovery has the potential to be the most dynamic global media company.”
The companies’ stated goal of $3 billion in cost synergies, she continued, is “highly achievable, if not conservative, given the several areas of duplicative expenses (e.g. tech, ad/distribution sales force etc.). Moreover, we see several areas for incremental rev. opportunities (e.g. scale in adv./distribution, pricing, AVOD), which have not been addressed within management guidance.” Discovery’s track record (it swallowed Scripps Networks Interactive in 2018 in a $14.6 billion takeover) has been one of “success,” the analyst maintained.
Streaming is a crucible for any company looking to measure up to Netflix, Amazon and Disney, Ehrlich acknowledges. In her report, she said she expects Warner Bros Discovery to combine HBO Max with Discovery+ into a single offering as opposed to a Disney-style bundle. She is not alone in that expectation, though pricing and user interface could be two short-term challenges for such a move. ) But Ehrlich believes a blended service “enhances the depth and breadth of content offerings, reduces churn, increases LTV (lifetime value) and improves GTM (go-to-market) efficiencies.”