AT&T Opts For Spin-Off In WarnerMedia Discovery Transaction; Shares Fall On Dividend Hit

AT&T shares are down by more than 4% after the telecom giant said it will spin off WarnerMedia as part of the pending $43 billion merger with Discovery, and reduce its dividend more steeply than anticipated.

The spin announcement, a major step forward for the biggest media hookup in years, came a bit sooner than expected as AT&T looks to finalize structural details ahead of DOJ regulators’ approval, which is expected next month.

AT&T had debated for months about whether to divest WarnerMedia via a spinoff or split. While the financial maneuvers are technical, each has implications for shareholders. AT&T has an unusually large number of individual, rather than institutional, investors compared with other U.S. corporations. A spinoff is simpler and cleaner, but a split would have reduced the number of AT&T’s shares outstanding, supporting the annual dividend paid to shareholders.

The new Warner Bros. Discovery will be run by current Discovery CEO David Zaslav. His CFO, Gunnar Wiedenfels, will hold the same position. Others on Zaslav’s top management team are also expected to remain, but there have been no formal announcements on that, or much else, as the regulatory process continues. AT&T is still nursing the wounds of a grueling antitrust fight with the government, which sued to try to block the $85 billion acquisition of Time Warner.

When the Discovery transaction closes, AT&T shareholders (not AT&T itself, to clarify a common misperception) will own 71% of Warner Bros. Discovery. They will receive 0.24 shares of Warner Bros. Discovery for each AT&T share held. So, a holder of four shares of AT&T would end up with one share of Warner Bros. Discovery. Then, there could potentially be some short-term volatility in Warner Bros. Discovery stock — ticker WBD — depending on what the new holders choose to do with the stock.

There will be 7.2 billion shares outstanding of AT&T at that point.

Shares in the new WBD will be distributed via a dividend of $1.11 per share, down from $2.08 per share. That’s is at the lower end of a $8 billion to $9 billion range projected by AT&T and nearly half the prior benchmark of $15 billion. Shareholders in AT&T have come to expect a robust dividend over many decades, but that obligation has limited the company’s maneuverability, especially in a cash-intensive business like streaming.

As WarnerMedia has sought to compete with Disney, Netflix and other entertainment rivals, it has been constrained by AT&T’s dividend obligations. A split, while a more complex undertaking, would have maintained the customary dividend level while reducing the number of shares outstanding. When AT&T reported fourth-quarter earnings last week, CEO John Stankey said the company would favor a solution that is “transparent and clean” for all parties.

“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,” Stankey said in a press release. “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.”

Shares in AT&T fell more than 6% in pre-market trade after the spin news. They have slumped ever since the Discovery deal was announced last May.

Jill Goldsmith contributed to this report.