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Is it better to spin or split? AT&T must make a critical decision about the Discovery Stake

AT&T

(Ticket T) has to decide what to do with a 71 percent stake in a company.

Discovery will get when it joins with WarnerMedia. The deal could be done by the end of the second quarter and it will get a lot of money from that.

An analyst at UBS thinks that AT&T is “leaning toward a split of the asset.” This means that AT&T stock will be exchanged for shares in Discovery, a company that will change its name to Warner Brothers Discovery when the deal is done.

It could help AT&T stock, which has risen this year after a bad year in 2021.

Shares of AT&T have risen almost 9% so far this year, to $27. People at Hodulik think the stock is worth buying, and they think it will go up to $34 a share.

A spin-off would be easy. Estimated 1.7 billion shares of the new company would be given to AT&T shareholders, who would get almost 0.25% for each share of AT&T. Such a move would be worth about $7 per AT&T share, based on the price of Discovery at $30. One of the best stocks in the S&P 500 is Discovery. The stock is up more than 20% in 2022, making it one of the best.

The other option, which is to split off, is more difficult. AT&T would let people trade their AT&T stock for Warner Brothers Discovery stock. AT&T is likely to give its investors a bonus to get them to switch to them. Hodulik suggested a deal of one share for one share.

Those who own AT&T stock would like that because Discovery now trades about $3 above AT&T stock.

AT&T could get rid of about $45 billion, or 1.7 billion of its 7.2 billion shares, if it splits itself off. based on AT&T’s previous financial forecasts, Hodulik thinks the AT&T dividend, which is now 7.8% and likely would be close to 6% after the deal, would be close to 6% in either case.

Another benefit of a split-off is that AT&T stockholders could choose whether to keep their AT&T stock or trade it for Warner BrothersDiscovery stock. A benefit of a spinoff would be that all AT&T shareholders would get shares in Warner Brothers Discovery and would be able to take part in any gains in the media company’s stock.

A split-off is more likely than a spin-off because AT&T has the ability to sell off almost a quarter of its stock at a low price.

Kannan Venkateshwar, a Barclays analyst, said last month that split-offs were the best way to structure a deal.

It would be about $1.18 per share in a spinoff, and about $1.55 per share in a split-off, says Hodulik. The yield would be a little higher if the company splits off.

Hodulik thinks AT&T is worth about six times its projected 2023 earnings of $4.43 a share in a split-off scenario, which is a lot less than the rival’s price.

There are a lot of people who work for Verizon

It’s almost 10 times expected 2023 earnings and has a 4.7% dividend yield, so (VZ) is very cheap.

In December, AT&T CFO Pascal Desroches told a conference that both a split and a spin were good ways to make money. “We think both are good ways to make money,” he said. When the time comes, we’re not going to make a decision until we know more about the two entities, including their share prices, and that’s when we’ll make the decision.

Hodulik: “We think that the deal structure will be clearer, and that AT&T shares will rise as a result.” An exchange structure would let shareholders decide how much they own of Warner Bros. and Discovery. We think AT&T will emerge from this deal as a smaller, more focused company that will be better able to invest in its core connectivity businesses.

About the author

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Kathy Lewis

Kathy Lewis is an all-around geek who loves learning new stuff every day. With a background in computer science and a passion for writing, she loves writing for almost all the sections of Editorials99.

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