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Why AT&T May Be Considering a Spinoff of its Discovery Stake


Some people think that the new Warner Bros. Discovery could be spun off in a simple way in the coming months, rather than through a complicated “split-off” or exchange offer.

One of those transactions will happen when you do this, so


WarnerMedia, which is part of the T ticker, will be merged with Discovery (DISCA).

As of last Wednesday, Wall Street thought that AT&T was likely to split off its business. AT&T CEO John Stankey made some comments on the company’s earnings call and later on CNBC. This week, Barron’s talked about the possibility of a split-off. As the big media deal is expected to close in the second quarter, analysts and investors have been speculating about AT&T’s decision. It could be made public as early as February before the deal is expected to close. Stankey’s comments may have made AT&T shares fall. They fell almost 10% on Wednesday, and they were trading at $25.27, up 7 cents, on Monday. Others like the idea of a split-off because it would likely get rid of more than 20% of AT&T’s shares.

It would be easier for Stankey’s large group of retail investors to understand if the company split off into a separate company, he said. Stankey didn’t want to deal with the value “leakage” that comes with a split-off.

People who own shares of AT&T would get an estimated 1.7 billion shares of the new company, which will be called Warner Bros. Discovery, in a spinoff. As of Monday, the share price of Discovery was up $1.21, to $28.26, so AT&T shareholders would get about a 0.24 share of the combined media company for each AT&T shares they own. This would mean that each AT&T share would be worth about $6.65.

Based on the current stock price of Discovery, the distribution would be about $48 billion, which would be a lot of money.

There has never been a split-off with a base like this before. When we think about our retail customers, it’s important to remember that they don’t always go as far into the ins and outs of things as our institutional customers do. In the future, he told CNBC that “I’m not sure I’m really a fan of the value leakage dynamic.” Afterward, a Morgan Stanley analyst said that AT&T’s renewed interest in separating WarnerMedia through a spin rather than a split or exchange offer was the most surprising thing.

In the event of a split-off, AT&T shareholders would be able to exchange all or part of their shares for Warner Bros. Discovery shares. AT&T might give its shareholders a good deal, like a share for share exchange into Warner Bros. and Discovery. That would add about 11% to the price at the moment. People who own AT&T stock would get to decide if they want to keep their shares or get Warner Bros. Discovery stock if the company splits off from AT&T. The deal would be like a huge buyback of AT&T’s low shares. “Value leakage” refers to the premium that holders get when they trade AT&T for Warner Bros. Discovery. This premium wouldn’t be there if the show was split off into its own company. Even though some of the money might leak out of a split-off, the positive reaction from investors could make up for it.

A simple share-for-share swap was used in our estimate of a possible premium, but 11 percent could be too high because it’s a lot more than we thought. A premium of 7% or 8% might be enough for you.

If you split off, you might have a lot of people sign up for the offer, since there’s a lot of money to exchange. Those who own shares of AT&T and Warner Bros. Discovery would be able to trade only a portion of their shares for Warner Bros. When


In 2008, L split off its stake in the cigarette company Lorillard. The split was about 50%.


A 7 percent premium was given as a reward for that exchange.

People who own AT&T and want to exchange 100 shares for Discovery would get 50 Discovery shares and keep 50 AT&T if there was a one-for-one exchange offer. In the event of a split-off, arbitrageurs would likely get in on the action and try to make money by buying AT&T stock and then trading it for something else. People who own AT&T would not have to pay taxes if the company splits off or spins off. AT&T may still split up.

As a New York tax expert, I would be surprised if AT&T didn’t split off after putting it all together. “I can tell you that every investor I’ve talked to over the last few months strongly prefers a split-off.” AT&T’s dividend, which is now $2.08 per year, will be cut after the deal with Warner, according to the company’s guidance. The exact timing of the cut is unknown. AT&T now makes more than 8%. This is how much dividends AT&T says it will pay out each year. Frank Louthan, a Raymond James analyst, said recently that he has been getting a lot of questions from people who want to buy stocks from the company. He thinks the dividend will be about $1.15 a share, which would give the stock a yield of 6%. A spinoff is assumed in this calculation, and the yield is calculated by subtracting the value of Warner Bros. Discovery, which is about $6.65 a share, from the value of AT&T shares today, which is about $102. AT&T’s dividend would be bigger in a split-off scenario, but its yield would be the same as in a spinoff.

About the author


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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