AT&T said on Tuesday it will spin off WarnerMedia in a $43 billion transaction to merge its media properties with Discovery and also cut its dividend by nearly half.
AT&T shareholders will own 71% of the new Warner Bros. Discovery company and will receive 0.24 shares of Warner Bros. Discovery for each AT&T share they own. AT&T will have 7.2 billion diluted shares outstanding after the transaction closes.
AT&T shares were down about 4% Tuesday morning.
AT&T will pay a dividend of $1.11 per share, down from $2.08 per share. This is at the lower end of an $8 billion to $9 billion range AT&T had forecast earlier.
The deal to unwind AT&T’s $85 billion purchase of Time Warner was announced early last year, but some financial details were not disclosed until Tuesday. AT&T reiterated its expectation the spin will close in the second quarter of 2022.
AT&T had contemplated a split-off, rather than a spin, of WarnerMedia. In that scenario, shareholders would have the option to exchange AT&T shares for stock in WarnerMedia-Discovery.
Stankey told CNBC last week a spin would avoid “leakage” in value because it’s tax free.
“To execute a split, especially one of this size, it would require some value leakage to execute that and actually get the shares placed,” said Stankey last week. “I’m not sure I’m really a big fan of that value leakage dynamic right now and being second guessed on it.”
Spinning WarnerMedia allows AT&T to focus its capital expenditure on building out its wireless network rather than spending on entertainment content to compete with Netflix, Disney and other streaming services. AT&T anticipates spending about $20 billion in capital expenditures this year to invest more heavily into fiber to the home broadband internet services and expanding its 5G wireless footprint.
The transaction will also help reduce AT&T’s heavy debt load. It ended the fourth quarter with net debt of $156.2 billion, giving it a net debt to adjusted EBITDA ratio of about 3.22 times.
AT&T said it expected the debt ratio to drop to 2.5 times by the end of 2023 and that it would consider share buybacks if the ratio is reduced further.
Warner Bros Discovery will be playing catch up to larger streaming video rival Netflix even though WarnerMedia’s HBO Max grew faster in the United States in the fourth quarter, ending the year with 74 million subscribers. Netflix has more than 222 million global subscribers.
Disney‘s financial results due next week will provide another gauge of the vitality of the streaming business as Wall Street questions if the industry-wide reorganization to focus on streaming video will pay off long term. That will help guide how investors value Warner Bros Discovery, which will trade under the ticker WBD.
Correction: This article has been refiled to remove an inadvertent symbol in debt ratio references.
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