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AT&T opts for WarnerMedia spinoff in Discovery merger, cuts dividend

AT&T said Tuesday it would spin off its interest in WarnerMedia following WarnerMedia’s merger with Discovery.

AT&T also said its board approved a post-close annual dividend of $1.11 a share, down from $2.08, to account for the spinoff of Warner Bros. Discovery Inc. The move on the dividend payout was expected. It will total $8 billion annually, at the low end of previous guidance from AT&T of $8 billion to $9 billion.

Under the terms of the all-stock deal, which is expected to close in the second quarter, AT&T will receive $43 billion in a combination of cash and other consideration, while AT&T’s shareholders will receive stock representing around 71% of the new company. Existing Discovery shareholders will own approximately 29% of the new company.

“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,” CEO John Stankey said in a press release. “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 spinoff distribution will let the market do what markets do best.”

When the transaction closes, each AT&T shareholder will receive an estimated 0.24 a share of the new common stock for each share of AT&T held on a tax-free basis. AT&T shareholders will continue to hold the same number of shares of AT&T.

The new company will be listed on the NASDAQ Global Select Market under the ticker “WBD.” Discovery’s current president and CEO, David Zaslav, will lead the new company, which will have a 13-member board.

AT&T executives had been prepping the markets for the announcement for a while, with Stankey commenting the company was favoring a spinoff — over an exchange offer or split-off — on the company’s earnings conference call last Wednesday.

A split-off, or exchange offer, would have given AT&T holders the option of exchanging all or part of their holdings for Warner Bros. Discovery shares, likely at a premium price. The current spinoff, which Stankey previously mentioned could be simpler and easier, limits investors’ options.

“I would be shocked if AT&T didn’t choose a split-off, after having teed it up,” said New York tax expert Robert Willens, who advises many institutional investors, before the announcement. “I can assure you that every investor I’ve spoken with over the past few months would strongly prefer a split-off.”

In Tuesday’s press release, AT&T said the transaction could give the company the chance to deleverage its balance sheet and focus on long-term demand for connectivity, especially expanding its 5G capabilities.

The combination of WarnerMedia and Discovery, in turn, is expected to create more than $3 billion in cost synergies by the end of the second year after the closing of the transaction. Executives believe the company to be spun off will accelerate plans to become a leader in direct-to-consumer media.

The shares were falling 4.7% to $24.30 on Tuesday. Barron’s

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