Why Wall Street doesn’t applaud WarnerMedia’s spinoff from AT&T
WarnerMedia's merger into Discovery and dividend cut is part of AT & T's strategy to focus on fiber and 5G
AT&T gets rid of WarnerMedia.
The US telecommunications giant said on Tuesday it would spin off WarnerMedia in a $ 43 billion transaction.
The transaction, announced last May , is part of AT&T's plan to merge the subsidiary with Discovery, creating a new company called Warner Bros Discovery. Closing is expected to take place in the second quarter of 2022.
The WarnerMedia spinoff allows AT&T to focus investments on building its own wireless network rather than entertainment content to compete with Netflix, Disney and other streaming services, CNBC points out.
But Wall Street did not welcome the announcement. Shares of AT&T plunged 4.5% in trading on Tuesday. The company said it plans to pay an annual dividend of $ 1.11 following the merger of its WarnerMedia business with Discovery. This is a drop from the current $ 2.08 per share.
Investors fear both competition and high capital costs in the wireless business and profit prospects for the streaming business, which will be at the heart of Warner Bros. Discovery.
DETAILS OF THE OPERATION
The transaction will unbundle AT & T's 100% interest in WarnerMedia to AT & T's existing shareholders in a prorated distribution.
AT&T shareholders will own 71% of the new Warner Bros. Discovery company. Discovery's current shareholders will own approximately 29% of the new company on a fully diluted basis.
THE DIVIDEND CUT
At the same time, the US telecoms group announced a dividend of $ 1.11 per share, down from $ 2.08 per share. The decision takes into account the distribution of WarnerMedia's stake to investors.
The detached coupons will total 8 billion in aggregate, at the lower end of the 8 to 9 billion range that AT&T had forecast in previous guidance.
AT&T FOCUSES ON FIBER
With the spin-off, AT&T expects to spend approximately $ 20 billion in investments this year to invest more in fiber for home broadband Internet services and to expand its 5G wireless footprint.
AND HOPES TO REDUCE DEBT
The transaction will help reduce AT & T's heavy debt burden. The company ended the fourth quarter with net debt of $ 156.2 billion, with an adjusted net debt / EBITDA ratio of approximately 3.22 times.
AT&T said it expects the debt-to-GDP ratio to drop to 2.5 times by the end of 2023 and would consider buying its own shares if the ratio is further reduced.
WARNER BROS DISCOVERY WILL COMPETE WITH NETFLIX AND DISNEY PLUS
Finally, the new company, the result of the merger, Warner Bros Discovery, will arrive in the panorama of entertainment and video streaming.
As Quartz points out, “for Warner it's just the latest change of hands in its long history of ownership changes. The film company dates back to one of the original Hollywood film studios and flows through mergers, acquisitions, and spin-offs of companies and properties including Time magazine, HBO, CNN, and AOL. "
Thanks to the merger, Warner Bros Discovery will play on par with the biggest video streaming rival Netflix. WarnerMedia's HBO Max streaming service grew fastest in the United States in the fourth quarter, ending the year with 74 million subscribers. But there is still a long way to go to reach Netflix which has more than 222 million subscribers worldwide.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/innovazione/perche-wall-street-non-plaude-allo-spinoff-di-warnermedia-da-att/ on Wed, 02 Feb 2022 10:55:04 +0000.