AT&T to spin off WarnerMedia in $43 billion Discovery merger, cuts dividend

AT&T Inc (T.N) said on Tuesday it will spin off WarnerMedia in a $43 billion transaction to merge its media properties with Discovery Inc (DISCA.O) and also cut its dividend by nearly half.

AT&T shareholders will own 71 per cent of the new Warner Bros. Discovery company and will receive a 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.

The US telecoms group 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.

In premarket trading, AT&T shares were down 4 per cent.

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.

“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 CEO John Stankey said in a prepared statement.

“We are confident both equities will soon be valued on the solid fundamentals and attractive prospects they represent.”

AT&T anticipates spending about $20 billion in capex this year to invest more heavily into fiber to the home broadband internet services and expanding its 5G wireless footprint.

The transaction will 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 per cent.

AT&T said it expected the debt ratio to drop to 2.5 per cent 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.

But the combination, which is expected to close in the second quarter, will be coming together just as Netflix is showing signs of maturity.

Netflix’s surprisingly weak guidance for the first quarter of the year spooked investors in the media sector, sparking a sector wide sell off.

Walt Disney Co’s (DIS.N) 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.