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AT&T Favors WarnerMedia Spin-Off Over Split, Wall Street Disagrees

AT&T Feb. 1 announced that its board of directors has decided to spin off AT&T’s interest in WarnerMedia instead of a split enabling the telecom’s shareholders to exchange their shares for stock in the new Warner Bros. Discovery company in connection with the previously announced $43 billion transaction with Discovery.

The transaction, which will spin off 100% 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, is expected to close in the second quarter of 2022.

Additionally, AT&T’s board approved an expected post-close annual dividend of $1.11 per AT&T share, 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.

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As previously disclosed, under the terms of the transaction, which is structured as an all-stock, Reverse Morris Trust transaction, AT&T will receive $43 billion (subject to working capital and other adjustments) in a combination of cash and other consideration, and AT&T’s shareholders will receive stock representing approximately 71% of the new company, Warner Bros. Discovery (WBD), on a fully diluted basis. Existing Discovery shareholders will own approximately 29% of the new company on a fully diluted basis.

On the closing date of the transaction, 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. AT&T has approximately 7.2 billion fully diluted shares outstanding. AT&T shareholders will continue to hold the same number of shares of AT&T after the transaction closes.

“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. “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.”

While the fiscal difference between a spin-off and split is largely in the weeds, AT&T’s announced dividend following the closing of the deal is almost half the telecom’s annual dividend of $2.08 per share. That news sent AT&T’s shares down almost 6% in premarket trading.

Stankey remained upbeat on the deal’s future impact for the telecom.

“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,” he said. “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.”

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