Shine keeps coming off AT&T-Discovery deal

AT&T’s plan to merge its media business with Discovery is looming into underwhelming focus. The $182 billion U.S. telecom giant on Tuesday gave more detail on the separation of WarnerMedia, and outlined a cut to its dividend. A $43 billion cash payment that AT&T will get as part of the package is clearly helpful. But as the deal gets closer, shareholders seem to get less excited.

Resizing AT&T’s shareholder payout isn’t itself a surprise – the company said it would do as much last May, when it first proposed putting its streaming business and some other assets into Discovery, which owns networks including HGTV and Animal Planet. The $1.11-per-share dividend disclosed on Tuesday sits at the bottom of the range the company set out when it first announced the deal, though. It is also a lower proportion of free cash flow than its last dividend. That’s perhaps one reason AT&T’s shares were down 5% in morning trading.

Shareholders also now know that they’ll be handed shares in the new spun-off business, an important detail. AT&T could have done it differently, say with a so-called splitoff, where investors get the choice of whether they end up with shares in the new company, or shares in the old one. That might have been preferable to shareholders for whom AT&T’s long-standing dividend is a huge draw, and who aren’t that keen to hold Discovery shares .

Then there’s the value of the deal as a whole. Discovery’s stock price on Tuesday implies the combined business, which leaves AT&T shareholders with a 71% stake, should be worth some $120 billion including debt. That means the market is valuing the new venture at around 8 times the $14 billion of combined EBITDA the companies expect within a couple of years, roughly in the range as ViacomCBS , according to Refinitiv. AT&T’s dividend cut doesn’t in theory affect the value of the spinoff.

Even so, the combination is hardly stellar for either side. While Viacom isn’t a bad yardstick, AT&T investors might have preferred a valuation somewhere closer to Netflix , which trades at 27 times forward EBITDA. Unlike Discovery shareholders, who include media mogul John Malone, they don’t get a vote on the deal, and in any case a cash injection from Discovery will help keep AT&T’s dividend going for a while. But that’s probably the best that can be said for it. Reuters