AT&T shares fell more than 4% after the telecoms giant said it would spin off WarnerMedia as part of its pending $43 billion merger with Discovery, and cut its dividend more sharply than expected.
The pivot announcement, a big step forward for the biggest media connection in years, came a little earlier than expected as AT&T looks to finalize structural details ahead of expected Justice Department regulatory approval. for the next month.
AT&T had debated for months whether to sell WarnerMedia through a spin-off or division. While the financial moves are technical, each has implications for shareholders. AT&T has an unusually large number of individual, rather than institutional, investors compared to other US corporations. A spin-off is simpler and cleaner, but a split would have reduced the number of AT&T shares outstanding, supporting the annual dividend paid to shareholders.
The new Warner Bros. Discovery will be headed by current Discovery CEO David Zaslav. Its CFO, Gunnar Wiedenfels, will hold the same position. Other members of Zaslav’s senior management team are also expected to remain, but there have been no formal announcements about that, or much else, as the regulatory process continues. AT&T is still nursing the wounds of a grueling antitrust fight with the government, which has sued to try to block its $85 billion acquisition of Time Warner.
When the Discovery transaction closes, AT&T shareholders (not AT&T itself, to clear up a common misperception) will own 71% of Warner Bros. Discovery. They will receive 0.24 shares of Warner Bros. Discovery for every share of AT&T they own. So a holder of four shares of AT&T would end up with one share of Warner Bros. Discovery. So there could be some short-term volatility in Warner Bros. Discovery stock (ticker WBD) depending on what new holders decide to do with the stock.
There will be 7.2 billion AT&T shares outstanding at that time.
The shares of the new WBD will be distributed through a dividend of $1.11 per share, compared to $2.08 per share. That’s at the low end of an $8 billion to $9 billion range projected by AT&T and nearly half the previous benchmark of $15 billion. AT&T shareholders have come to expect a solid dividend for many decades, but that obligation has limited the company’s maneuverability, especially in a cash-intensive business like streaming.
As WarnerMedia has sought to compete with Disney, Netflix and other entertainment rivals, it has been constrained by AT&T’s dividend obligations. A spin-off, even if it had been a more complex company, would have maintained the usual dividend level while reducing the number of shares outstanding. When AT&T reported fourth-quarter earnings last week, CEO John Stankey said the company would favor a solution that is “transparent and clean” for all parties.
“In evaluating the form of distribution, we are guided by one goal: to execute the transaction as seamlessly as possible to support long-term value creation,” Stankey said in a press release. “We are confident that the spin-off will achieve that goal because it is simple, efficient, and results in AT&T shareholders owning stock in both companies, each of which will have the ability to generate better returns consistent with their respective market opportunities. ”.
AT&T shares fell more than 6% in premarket trading after news of the spin. They have slumped since the Discovery deal was announced last May.
Jill Goldsmith contributed to this report.