AT&T's stock could jump roughly 50% from current levels as its newly formed media conglomerate with Discovery unlocks value, BofA says

• AT&T's deal with Discovery could add anywhere from $1 to $16 to AT&T's stock price, Bank of America said.
• The company said it would spin off its content unit and merge it with Discovery to create a new entertainment company.
• AT&T shareholders would benefit from reduced exposure to the cash flow burden of future content investment, the firm said.

AT&T's stock price could benefit from the company's spinoff of its WarnerMedia content unit, according to a team of Bank of America analysts.

On Monday AT&T said it would spin off its WarnerMedia content unit and merge it with Discovery. AT&T would get $43 billion in cash, debt securities, and WarnerMedia's retention of certain debt. AT&T shareholders are set to receive stock equating to 71% of the new company, with Discovery shareholders owning the remainder.

Analysts led by David W. Barden said in a Monday note that if the transaction is confirmed, the deal could add a range of $1 to $16 a share to AT&T's stock price. With AT&T currently hovering around $32 a share, a $16 increase would represent a 49% gain. However, the analysts maintained their "buy" rating and price target of $36 for AT&T.

"For AT&T shareholders... if a deal were to proceed as per media reports, in our view they would have exposure to 1) greater scale, 2) new synergies, 3) a pure-play valuation on the media assets including the combined HBO Max and Discover+, and 4) reduced exposure to the cash flow burden of future content investment," BofA said.

The combined entity would have access to AT&T's CNN, HBO, TBS, TNT and Warner Brothers studios and Discovery's HGTV, Food Network, TLC and Animal Planet. Bank of America said the valuation on those media assets will help AT&T shareholders.

"Given a choice between acquiring new media assets and spinning out a pure play, we believe shareholders are benefited by the latter," BofA said. "A combined entity would have an enhanced ability to offer the widest variety of content to attract the largest possible subscriber base on a global basis."

AT&T is reversing out of its media strategy in this deal, but the analysts said that the telecom giant may still benefit from the relationship it had with content giants it once owned.

"We assume though that if a deal were to proceed as media reports suggested, AT&T would retain preferential access/rights that would continue to benefit its connectivity platform," said the analysts.

AT&T shares jumped as much as 5% on Monday morning but pared back gains into the trading day. The telecommunications behemoth is up 13.2% year-to-date.