AT&T Stock, Bond Prices Climb After Discovery Deal
By Sebastian Pellejero and Nina Trentmann
AT&T Corp.'s stock and bond prices rose Monday after the
telecommunications company and Discovery Inc. said they plan to
combine their media assets into a new publicly traded company.
AT&T's shares rose 1.9% after the announcement, which would
spin off the company's WarnerMedia division, unwinding a big bet on
entertainment just three years after it acquired the owner of Time
Warner Inc. for about $81 billion.
Bond prices rose, with analysts saying the deal would help
reduce the $169 billion in net debt AT&T reported at the end of
March. AT&T is the most-indebted nonfinancial U.S. company,
according to FactSet data, raising worries for some about the
conglomerate's financial flexibility.
AT&T said it would receive $43 billion from the deal in a
combination of cash, debt securities and WarnerMedia's retention of
certain debt. The company also plans to reduce its dividend and
intends to use some of the funds to bring down debt.
The deal will help address investors' concerns, AT&T Chief
Financial Officer Pascal Desroches said. AT&T expects its ratio
between net debt and earnings before interest, tax, depreciation
and amortization will hit 2.5 times by the end of 2023 -- ahead of
its previous goal of 2024, Mr. Desroches said. "This checks a lot
of boxes," he said, referring to the transaction. "This is a very
good move for equity holders...and bondholders of AT&T," Mr.
A $7.5 billion AT&T bond due in 2053 recently traded for
93.696 cents on the dollar, according to MarketAxess, translating
to an extra yield, or spread, above U.S. Treasurys of 1.48
percentage points. The same bond traded Friday at 91.7 cents for a
1.59 percentage point spread. A smaller spread signals a lower
perceived risk of default.
"AT&T has been clear that debt reduction is a primary focus
for the company," wrote CreditSights analysts in a note Monday. "We
believe AT&T should receive significant cash back in the deal,
with the large majority to be used for debt repayment."
Discovery's Class A shares fell 1.8%. A $1.7 billion bond due in
2055 traded with a spread of 1.76 percentage points, little changed
The spinoff is the latest in a series of deals by AT&T Chief
Executive John Stankey to refocus the company on its core
telecommunications businesses. Earlier this year, the company sold
a 30% stake in DirecTV to private-equity group TPG in a deal that
valued the television division at a third of what AT&T had
purchased it for six years ago.
The combination of WarnerMedia and Discovery's assets will
create the second largest media company in the world behind Walt
Disney Co. It could include access to AT&T's CNN, HBO, TBS, TNT
and Warner Bros.' studios, along with Discovery's HGTV, Food
Network, TLC and Animal Planet. The new combined company will have
an enterprise value of about $152 billion, including $56 billion in
"The greater the content choice offered to subscribers, the
greater the success of the service over the long-term," said Bank
of America analysts in a note. That larger scale and reduced
exposure to the costs of investing in new content could benefit
AT&T shareholders, they added, who will own 71% of the new
At the same time, some analysts were surprised to see AT&T
choose a tax-free spinoff, which limits the amount of cash proceeds
and net debt reduction that the company can extract from the deal.
The structure accelerates the timing of AT&T returning to a
company focused on communications and improves the company's
flexibility to invest in its wireless and fiber networks.
"We are structuring it in a very tax-efficient way," Mr.
To account for the distribution of WarnerMedia assets into a new
company, AT&T has disclosed that it expects to cut its annual
dividend by 45% to 50% from the current level, according to
estimates from Citibank. That would remove AT&T from the list
of so-called dividend aristocrats, or companies that have increased
their base dividend payout for each of the past 25 years.
AT&T's dividend will still be healthy after the reduction, Mr.
"We believe that alternative structures could have opened the
door to great financial flexibility for AT&T to sustain the
dividend, but the execution and unwinding of the [equity] stake
would likely have taken significant time," Citi analysts wrote in a
Sam Goldfarb contributed to this article.
Write to Sebastian Pellejero at email@example.com and
Nina Trentmann at Nina.Trentmann@wsj.com
(END) Dow Jones Newswires
May 17, 2021 12:35 ET (16:35 GMT)
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