AT&T opts for WarnerMedia spin-off in Discovery merger

Deal to unwind AT&T's $85bn purchase of Time Warner was announced early last year

epa09206588 (FILE) - An AT&T logo in New York, New York, USA, 04 December 2008 (reissued 17 May 2021). According to a company statement, AT&T's entertainment branch WarnerMedia and US media company Discovery will merge into a standalone company.  EPA/JUSTIN LANE *** Local Caption *** 53909438
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AT&T said on Tuesday it will spin off WarnerMedia in a $43 billion transaction to merge its media properties with Discovery and also cut its dividend by nearly half.

Shareholders in AT&T will own 71 per cent of the new Warner Bros Discovery company and will receive 0.24 shares of the company for each AT&T share they own. AT&T will have 7.2 billion diluted shares outstanding after the transaction closes.

The US telecoms group will pay a dividend of $1.11 per share, down from $2.08 per share. This is at the lower end of an $8bn to $9bn range AT&T had forecast earlier.

AT&T shares fell about 5 per cent at the open.

The deal to unwind AT&T's $85bn purchase of Time Warner was announced early last year, but some financial details were not disclosed until Tuesday.

“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,” AT&T chief executive John Stankey said in a prepared statement.

“We are confident both equities will soon be valued on the solid fundamentals and attractive prospects they represent.”

AT&T expects to spend about $20bn in capex this year to invest more heavily in fibre for home broadband internet services and expanding its 5G wireless footprint.

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

AT&T said it expected the debt ratio to drop to 2.5 times by the end of 2023 and that it would consider share buy-backs if the ratio is reduced further.

Warner Bros Discovery will be playing catch-up to larger streaming video rival Netflix, even though WarnerMedia's HBO Max grew faster in the US in the fourth quarter, ending the year with 74 million subscribers.

But the combination, which is expected to close in the second quarter, will be coming together right as Netflix is showing signs of maturity.

Netflix's surprisingly weak guidance for the first quarter of the year spooked investors in the media sector, sparking a sector-wide sell-off.

Disney's financial results due next week will provide another gauge of the vitality of the streaming business as analysts questions if the industrywide reorganisation to focus on streaming video will pay off in the long term.

Updated: May 15, 2023, 4:58 PM