AT&T’s board of directors has decided to spin off the telecom giant’s holding in entertainment unit WarnerMedia in connection with the megadeal that will merge it with Discovery Inc., the company said on Tuesday.
The merger that will create Warner Bros. Discovery was structured as a so-called Reverse Morris Trust. One element of this structure that has so far been keeping investors guessing was how AT&T would distribute shares of WarnerMedia to its stockholders. The options were the now-chosen spinoff, in which AT&T stockholders would receive shares in the new company in addition to their existing AT&T shares; a split-off, which would have allowed shareholders to choose between stock of AT&T or the new company; or some combination of the two.
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“In evaluating the form of distribution, we were guided by one objective — executing the transaction in the most seamless manner possible to support long-term value generation,” AT&T CEO John Stankey said on Tuesday. “We are confident the spin-off achieves that objective because it’s simple, efficient and results in AT&T shareholders owning shares of both companies, each of which will have the ability to drive better returns in a manner consistent with their respective market opportunities.”
He added: “We believe that the remaining AT&T and the new Warner Bros. Discovery (WBD) are two equities that the market will want to own and the markets to support those equities will develop. Rather than try to account for market volatility in the near-term and decide where to apportion value in the process of doing an exchange of shares, the spin-off distribution will let the market do what markets do best. We are confident both equities will soon be valued on the solid fundamentals and attractive prospects they represent.”
As result, AT&T said the transaction will “spin off 100 percent of AT&T’s interest in WarnerMedia to AT&T’s existing shareholders in a pro rata distribution, followed by the merger of WarnerMedia with Discovery,” which is expected to close in the second quarter. “Each AT&T shareholder will receive, on a tax-free basis, an estimated 0.24 shares of the new WBD common stock for each share of AT&T common stock held as of the record date for the pro rata distribution.
“The exact number of shares of WBD to be received by AT&T shareholders for each AT&T common share will be determined closer to the closing based on the number of shares of AT&T common stock outstanding and the number of shares of Discovery common stock outstanding on an as-converted and as-exercised basis,” the company said. AT&T shareholders will own 71 percent of the combined Warner Bros. Discovery.
AT&T also announced that, following the completion of the transaction, it expects to cut its annual dividend from $2.08 per share to $1.11 a share, “or approximately $8 billion in aggregate,” reflecting “a target dividend payout ratio in the first full year after close of the transaction of 40 percent.” The company said this will “account for the distribution of the WarnerMedia Business to AT&T stockholders and support AT&T’s plans to step up investment in its growth areas of 5G and fiber.”
AT&T shares fell in pre-market trading and were down 4.3 percent to $24.40 as of 7:45 a.m. ET. Discovery’s stock was down 2.9 percent at $27.10 at that time.
