AT&T (NYSE:T) confirmed this morning that it would be spinning off WarnerMedia in a $43 billion transaction. The transaction will have WarnerMedia merge its properties with Discovery (NASDAQ:DISCA). In addition, the new company will be named Warner Bros. Discovery and carry the ticker WBD. As a result of this news, shares of DISCA stock are up 2%, while shares of T stock are down 4%.
So, why are shares of T stock down so much?
AT&T also announced that it would be paying a dividend of $1.11 per share, which was down from the previous figure of $2.08 per share. This may factor into T stock’s decline today. Furthermore, AT&T shareholders will own 71% of Warner Bros. Discovery and receive 0.24 shares of WBD stock for each share of T stock owned upon completion of the transaction. The transaction is expected to be completed during the second quarter of this year.
So, what else should investors know about the WarnerMedia spinoff? Let’s jump right in.
What to Know as AT&T Spins Off WarnerMedia
- AT&T acquired Time Warner in 2018 for $85 billion. At the time, the acquisition faced scrutiny by the Department of Justice (DOJ), but was ultimately approved. Time Warner’s name was later changed to WarnerMedia.
- AT&T selling WarnerMedia for less than it acquired it for may be factoring into T stock’s decline.
- In addition, AT&T stated that it had contemplated splitting off WarnerMedia instead of spinning off. In the instance of a split-off, shareholders of T stock would have the option to exchange their stock for WBD stock.
- WarnerMedia’s brands include HBO, CNN, Adult Swim and Cartoon Network.
- Furthermore, AT&T’s new dividend will cost it just under $8 billion per year. In 2021, AT&T paid out dividends worth approximately $15 billion.
- Spinning off WarnerMedia will allow AT&T to concentrate on improving its wireless network. Additionally, AT&T forecasts $20 billion of capital expenditures this year on 5G and home broadband service improvements.
- The WarnerMedia spinoff will also help AT&T reduce its debt. AT&T reported net debt of $156.2 billion during the fourth quarter.
- AT&T carries a net debt to adjusted earnings before interest, taxes, deductions and amortizations (EBITDA) ratio of 3.22. The mobile services provider stated that it expects the ratio to fall to 2.5 by the end of 2023. If the ratio is reduced further, then AT&T may consider share buybacks.
- After the transaction closes, AT&T will have 7.2 billion diluted shares outstanding. However, the transaction must first receive approval from federal regulators.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions 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.