AT&T (T) said Tuesday it will spin-off its interest in WarnerMedia to shareholders when it closes its $40 billion media merger with Discovery (DISCA).
AT&T said shareholders will get 0.24 WarnerMedia/Discovery shares for each AT&T share when the deal is closed, which is now expected to by the end of the second quarter. The ratio will mean AT&T shareholders will own 71% of the combined group, with the remaining 29% taken-up by Discovery shareholders.
The AT&T board also approved a post-close payout of $1.11 per share, or $8 billion per year, "to account for the distribution of WarnerMedia to AT&T shareholders and to size the annual dividend payout at approximately 40% of projected free cash flow to enable investment in attractive growth opportunities. The prior payout was $2.08 per share, or around $15 billion.
The move is also designed to compensate investors who were hit by news that the payout ratio would be "re-sized" when AT&T agreed to take $43 billion in cash and securities in exchange for its WarnerMedia division, which include one of Hollywood's top studios as well as the streaming giant HBO Max, with Discovery's stable of unscripted programs and channels such as the Food Network last spring.
“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,” said CEO John Stankey. “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."
“We believe that the remaining AT&T and the new WBD are two equities that the market will want to own and the markets to support those equities will develop,” Stankey added. “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."
AT&T shares were marked 4.3% lower in mid-day trading Tuesday to change hands at $24.40 each. Discovery shares, meanwhile, rose 1.9% to $26.47 each as investors made room for the new 1.7 billion in new shares expected to hit the market once the deal is complete.
Last week, AT&T posted stronger-than-expected fourth-quarter earnings as subscribers to its HBO streaming services neared 74 million, boosting revenues in its WarnerMedia division.
T&T said it had 73.87 million global subscribers to its HBO and HBO Max streaming services, topping its plans for a total of between 70 million and 73 million, as it continues to challenge its larger rival Netflix NFLX for new additions. WarnerMedia revenues, where HBO and HBO Max are based, rose 15.4% to $9.9 billion.
Shares in the group, however, were marked lower as investors reacted to a softer-than-expected 2022 outlook for adjusted earnings, which the group sees at $3.10 to $3.15 per share, as well as a 'low single-digit' growth estimate for group revenues.
