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

AT&T said Tuesday that it will play WarnerMedia in a $ 43 billion deal to merge its media properties with Discovery and reduce 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 every AT&T part they have. AT&T will have outstanding 7.2 billion diluted shares after the closing of the transaction.

AT&T shares were down about 4% on Tuesday morning.

AT&T pays $ 1.11 dividends per share, down from $ 2.08 per share. This is at the lower end of a range of $ 8 billion to $ 9 billion that AT&T predicted earlier.

The deal to relax AT & T’s $ 85 billion acquisition of Time Warner was announced early last year, but some financial details were not disclosed until Tuesday. AT&T reiterated its expectation that the spin will close in the second quarter of 2022.

AT&T had planned a split-off, instead of a spin, of WarnerMedia. In that scenario, shareholders would have the option to exchange AT&T shares for shares in WarnerMedia-Discovery.

Stankey told CNBC last week a spin would prevent “leakage” in value because it is tax free.

“To execute a split, especially one of these sizes, it would take some value leakage to execute that and get the shares actually placed,” Stankey said last week. “I’m not sure I’m really a big fan of that value-added dynamic right now and that I was second to none.”

Spinning WarnerMedia lets AT&T focus its capital expenditures on expanding its wireless network instead of spending on entertainment content to compete with Netflix, Disney and other streaming services. AT&T expects to spend some $ 20 billion this year on capital expenditures to invest more in glass fiber to its home broadband Internet services and expand its 5G wireless footprint.

The transaction will also help reduce AT & T’s heavy debt. It ended the fourth quarter with a net debt of $ 156.2 billion, giving it a net debt to adjusted EBITDA ratio of approximately 3.22 times.

AT&T said it expected the debt ratio to fall to 2.5 times by the end of 2023 and that it would consider repurchasing shares if the ratio were further reduced.

Warner Bros. Discovery will 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 worldwide subscribers.

Disney’s financial results expected next week will provide another measure of the streaming company’s vitality, as Wall Street raises the question of whether the reorganization in the industry to focus on streaming video in the long run check out. That will help lead to how investors value Warner Bros. Discovery, which trades under the ticker WBD.

–Reuters contributed to this report.

Correction: This article has been supplemented to remove an unintentional symbol in references to debt ratios.

WATCH: AT&T CEO John Stankey talks to CNBC’s David Faber


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