AT&T’s Move to Spin Off WarnerMedia Disappoints Investors

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AT&T

‘s decision Tuesday to spin off its stake in WarnerMedia to shareholders isn’t a surprise given recent comments by CEO John Stankey.

 But the move may disappoint investors who were hoping for a split-off, or exchange offer, which would have resulted in the retirement of more than 20% of

AT&T

‘s shares outstanding.

Shares of AT&T (ticker: T) were down 93 cents, or 3.6%, to $24.57 in premarket trading on Tuesday.

AT&T also said that it planned to pay a $1.11 annual dividend, down from the current $2.08 a share, following the merger of its WarnerMedia business with

Discovery

(DISCA), which is expected to close in the second quarter. The new company will be called Warner Bros. Discovery.

The payout move was expected, but the dividend payments, which will total $8 billion annually based on the company’s 7.2 billion shares outstanding, are at the low end of a previous guidance of $8 billion to $9 billion. The dividend payments amount to roughly 40% of AT&T’s postdeal annual free cash flow.

Barron’s wrote Monday that AT&T appeared to be leaning toward a spinoff of WarnerMedia. We cited Raymond James analyst Frank Louthan, who projected a $1.15 annual dividend.

The new yield on AT&T will be about 6.2% based on the $1.11 annual payout, down from more than 8% now. We calculate the yield by subtracting the value of the Warner Bros. Discovery stock to be received by AT&T holders from the current premarket price of $24.57. Discovery’s class A shares—which will turn into Warner Bros. Discovery stock following the merger—finished Monday at $27.91. In comparison, rival

Verizon Communications

(VZ) now yields 4.8%.

AT&T holders should get about $6.70 a share in Warner Bros. Discovery stock for every AT&T share based on the current Discovery price. AT&T holders will get roughly 0.24 shares of the new Warner Bros. Discovery stock for each AT&T share.

The merger of WarnerMedia into Discovery and the dividend cut are part of AT&T’s strategy to focus on its core telecommunications operations and generate sufficient cash flow for investment and debt reduction. AT&T said that its dividend would remain among the highest among major corporations and within the

S&P 500
index.

“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 in a statement Tuesday.

 “We are confident the spinoff 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.”

Wall Street had been anticipating a split-off until Stankey’s comments on AT&T’s earnings conference call last week and subsequently on CNBC. He said that a spinoff would be simpler, quicker, easier for AT&T’s big retail base to understand and not involve the value “leakage” of a split-off.

With the spinoff, AT&T holders don’t need to do anything. They will get roughly a 0.24 share of Warner Bros. Discovery for each AT&T share at the closing of the transaction on a tax-free basis.

AT&T holders will get about $47 billion of Warner Bros. Discovery stock based on current prices. AT&T holders will own 71% of the newly created media company, and AT&T also will receive $43 billion in cash and other consideration in the merger.

With a split-off, AT&T holders would have had the option of exchanging their AT&T stock for Warner Bros. Discovery. AT&T would have had to offer a premium to give holders an incentive to make the exchange, such as a share for share swap into Discovery stock. That premium was the “leakage” that Stankey said he wasn’t excited about.

AT&T holders now will be able to participate in two out-of-favor businesses, telecom and media. AT&T’s stock price remains near a 10-year low, while Discovery stock is back where it stood five years ago. Investors worry about competition and high capital costs in the wireless business and competitive pressures and the murky profit outlook for the streaming business, which will be a focus on Warner Bros. Discovery.

Barron’s made AT&T one of our top picks for 2022 arguing that both the telecom and media businesses were underappreciated by investors.

Write to Andrew Bary at [email protected]