AT&T (NYSE:T) will likely have to provide an update to shareholders fairly soon about the proposed merger of its WarnerMedia division with Discovery, Inc. (NASDAQ:DISCA, NASDAQ:DISCB). So far, investors in T stock don’t know the exact mechanics of what is going to happen. How long can that last?
Even more interesting, most of the updates in this regard seem to be coming from Discovery, not AT&T. For example, the latest S-4 amendment (which is required for mergers or acquisitions) from Discovery was filed on Dec. 29.
Shareholders of T stock will want to know the specifics of this spinoff or exchange offer fairly soon. Otherwise, they will not know how to properly value their ownership of AT&T shares.
Details of the Latest S-4 Filing
Here is what is interesting about the latest S-4. The term “distribution” is used 1,296 times in that document. However, the document still does not describe the nature of the distribution.
For merger specialists out there, this transaction is neither a forward triangular merger nor a reverse triangular merger. This is because there is neither a buyer nor a seller in the deal.
In this situation, a new company is being formed called Warner Bros Discovery (WBD). WBD will be owned 71% by shareholders of the WarnerMedia division and 29% by the Discovery Inc shareholders.
As I have explained before, to make things even more complicated, the term “Spinco” is used in the S-4 for the shareholders of WarnerMedia. At first, AT&T will own the 71% stake (i.e., the Spinco stake) in WBD. But the S-4 reports that AT&T will do a “distribution.” This is where things get murky.
For example, here is the statement in the S-4 about the exact nature of the distribution:
“Based on market conditions prior to the closing of the Merger, AT&T will determine whether the shares of Spinco common stock will be distributed to AT&T stockholders in a pro rata distribution or an exchange offer and if conducted as an exchange offer, the terms thereof (including whether to offer any discount for shares of Spinco common stock).”
Why You Don’t Want an Exchange Offer
Remember this is in a document filed by Discovery, not AT&T. So the S-4 says AT&T has not yet decided when to spin off (i.e., “a pro rata distribution”) or conduct an “exchange offer.”
As you can imagine, an exchange offer is not as advantageous as a spinoff. If you have to give up your shares of AT&T or a portion of your T stock in order to get WBD shares, you are out the AT&T shares. In a spinoff, you end up with both T shares and WBD shares.
I suspect that AT&T is holding off on this decision, as they may be considering doing an exchange offer. That will not be very popular with shareholders.
However, it will be clearly to the advantage of AT&T, since it will effectively function as a buyback. The number of T shares outstanding will be much lower, and that could kick up the remaining value of T stock. But you will never know exactly how much the stock will rise.
What to Do With T Stock
I think this move by AT&T is not right. The company is big enough and secure enough to let its shareholders know whether the “distribution” will be a spinoff or an exchange offer. At some point, shareholders will start demanding to know what is going on here.
As a result, T stock may have a limited upside until its owners can really decide what they get at the end of the day. I suspect many shareholders are going to look into this more carefully, especially as the time for the distribution approaches.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.