AT&T, Discovery Fall on Dividend Reduction in Warner Spinoff

(Bloomberg) -- AT&T Inc. shares declined after the telecommunications giant said it will pay a dividend at the lower end of its previously announced range following the spinoff of its WarnerMedia business to Discovery Inc.

AT&T will lower its dividend payout ratio to about 40% of cash flow, the company said in a filing. That translates to about $1.11 a share, or $8 billion annually. AT&T had originally planned to pay a ratio of 40% to 43%, or as much as $9 billion. Prior to the deal AT&T's dividend was $2.08 a share, or about $15 billion.

The company's shares fell 4.8% to $24.32 and Discovery was down 6% at 9:37 a.m. in New York. With the planned payout, AT&T emphasized, its dividend yield will still be among the highest among U.S. companies, in the mid-90th percentile.

The combination will create one of the world's largest media companies with movie studios, premium programming including HBO, live broadcasts of sports and news and a library of TV shows and films to rival online giants Netflix Inc. and Walt Disney Co.'s Disney+.

Tuesday's filing also spells out the structure that AT&T decided to use for the transaction, opting for a spinoff instead of a split-off. A spinoff is a simpler exchange of AT&T shares for a stake in Warner Bros. Discovery. A split-off would have given AT&T shareholders an option to take stock of the new company or sell shares back to AT&T. To avoid the risks and complications, the company opted for the spinoff, with AT&T shareholders to receive about 0.24 share of the new company for each of their shares.

In the transaction, AT&T will get $43 billion worth of cash and debt considerations. The company expects to close the deal in the second quarter. AT&T shareholders will get stock representing 71% of the new company, which is called Warner Bros. Discovery and will list on the Nasdaq. Discovery shareholders will have 29% of the company.

AT&T acquired the assets when it purchased Time Warner Inc. for $85 billion in 2018. After facing challenges trying to integrate the media division and several management restructurings, AT&T Chief Executive Officer John Stankey decided to change course on the strategy and focus on the company's connectivity business.

AT&T says it will use the proceeds of the transaction to invest in areas like 5G and fiber network expansion. It will also have cash on hand to pay down debt. The company is targeting a leverage ratio of 2.5 times by the end of 2023.