- AT&T announced it is spinning off WarnerMedia in a $43 billion deal. These are the details.
Today AT&T, Inc. (NYSE: T) announced that its board of directors has determined to spin off AT&T’s interest in WarnerMedia in connection with the previously announced transaction with Discovery, Inc (NASDAQ: DISCA, DISCB, DISCK). The deal — which will spin off 100% of AT&T’s interest in WarnerMedia to AT&T’s existing shareholders in a pro-rata distribution, followed by the merger of WarnerMedia with Discovery — is expected to close in the second quarter of 2022.
AT&T’s board of directors also approved an expected post-close annual dividend of $1.11 per AT&T share to account for the distribution of WarnerMedia to AT&T shareholders and to size the annual dividend payout at approximately 40% of projected free cash flow to enable investment in attractive growth opportunities.
As previously announced under the terms of the transaction — which is structured as an all-stock, Reverse Morris Trust transaction — AT&T will receive $43 billion (subject to working capital and other adjustments) in a combination of cash and other consideration, and AT&T’s shareholders will receive stock representing approximately 71% of the new company, Warner Bros. Discovery, Inc. (WBD), on a fully diluted basis. The existing Discovery shareholders will own approximately 29% of the new company on a fully diluted basis.
On the closing date of the deal, each AT&T shareholder will receive, on a tax-free basis, an estimated 0.24 shares of the new WBD common stock for each share of AT&T common stock held as of the record date for the pro-rata distribution. The exact number of shares of WBD to be received by AT&T shareholders for each AT&T common share will be determined closer to the closing based on the number of shares of AT&T common stock outstanding and the number of shares of Discovery common stock outstanding on an as-converted and as-exercised basis. And AT&T has about 7.2 billion fully diluted shares outstanding. AT&T shareholders are going to continue to hold the same number of shares of AT&T after the transaction closes.
The closing of the transaction remains subject to satisfaction of certain conditions, including obtaining all necessary regulatory approvals. And no action is required by AT&T’s shareholders to receive shares of WBD common stock in the merger when it occurs.
Following the closing of the transaction, the WBD common stock is expected to be listed on the NASDAQ Global Select Market under the ticker “WBD.” And in connection with the transaction, all classes of shares of Discovery capital stock will be converted and reclassified into common shares of WBD with one vote per share. AT&T will continue to trade on the NYSE under the ticker “T.”
For AT&T, this transaction provides an opportunity to deleverage their balance sheet and capitalize on the longer-term demand for connectivity while unlocking value for shareholders in its media assets on a tax-efficient basis and creating through WBD a stronger global competitor in streaming and digital entertainment.
WBD expects to realize cost synergies of over $3 billion on a run-rate basis by the end of the second full year after the closing of the transaction as a result of technology, marketing, and platform efficiencies. And as previously announced, Discovery President and CEO David Zaslav will lead WBD with a best-in-class management team and operational and creative leadership from both companies.
The new company’s Board of Directors will consist of 13 members, 7 initially appointed by AT&T, including the chairperson of the board; Discovery has designated six members, including Zaslav.
AT&T said its shareholders will benefit after close from:
— Ownership of approximately 71% of WBD, a leading global media company with a broad portfolio of brands that’s well-positioned to be a global direct-to-consumer leader. And WBD will combine WarnerMedia’s premium entertainment, sports and news assets with Discovery’s leading nonfiction and international entertainment and sports businesses to create a premier, standalone global entertainment company.
— Expected annual dividend of $1.11 per AT&T share, or about $8 billion in aggregate, reflecting a target payout ratio in the first full year after close of 40%.
— Consistent with AT&T’s guidance when it announced the transaction in May 2021, the expected annual dividend per share is being changed from $2.08 to $1.11 to account for the distribution of WarnerMedia to AT&T shareholders and support AT&T’s plans to step up investment in its growth areas of 5G and fiber.
— With an expected annual dividend of $1.11 per share, AT&T will continue to deliver an attractive dividend yield and be among the highest dividend yield payers in corporate America — estimated in the mid-90th percentile.
— The deal creates substantial value opportunity for AT&T shareholders through AT&T’s expected increased investment in 5G and fiber. And AT&T expects its 5G C-band network will cover 200 million people in the U.S. by year-end 2023. Plus AT&T plans to expand its fiber footprint to cover 30 million customer locations by year-end 2025.
— AT&T expects to use the estimated $43 billion (subject to adjustments) in proceeds from the transaction to deleverage and position the company as one of the best capitalized 5G and fiber broadband companies in the United States. AT&T expects a Net Debt to Adjusted EBITDA ratio of 2.5x by year end 2023.
— Creates additional financial flexibility to invest in the business and the ability to pursue additional shareholder value-creation initiatives, including the potential for AT&T share repurchases once Net Debt to Adjusted EBITDA is less than 2.5x.
KEY QUOTES:
“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. 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.”
“We believe that the remaining AT&T and the new WBD are two equities that the market will want to own and the markets to support those equities will develop. 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. We are confident both equities will soon be valued on the solid fundamentals and attractive prospects they represent.”
— AT&T CEO John Stankey
