How The Warner Media and Discovery Deal Affects AT&T's Stock

Mark Hake

AT&T (T) stock closed at $25.10 on Friday, Nov. 5, and it could be stuck to close to this price for quite a while. The reason is the spin-off of its Warner Media division and combination with Discovery Inc (DISCA) has an implied value given where DISC stock trades now.

That implied value, combined with a related dividend cut, which AT&T has previewed, implies that T stock trades at a level post-transaction with about a 6% yield.

That dividend is close to where the stock has traded in the last four years.

Investors might be wondering how that can be. I explained this dividend cut in my previous Newsbreak article two weeks ago. Suffice it to say, that even though AT&T pays a dividend now of $2.08 annually, its future dividend will probably be about $1.15.

But now, we can estimate AT&T's value post the spin-off transaction by looking at Discovery stock.

Analyzing the Deal Value

Here is the background. On May 17, AT&T agreed to combine its Warner Media division with Discovery, Inc. However, the company will trade as a separate public company. AT&T shareholders will get to own 71% of the company (29% to Discovery).

Now, the key to this analysis is the market value right now of Discovery stock. For example, Seeking Alpha indicates that its market capitalization, combining all of its classes of shares, is $16.69 billion.

Therefore, since the Warner Media division will be combined with Discovery, one could reasonably assume that Discovery's value likely reflects the value post-transaction.

For example, if we divide its $16.69 billion market value by its future 29% stake in the combined company, the two companies are worth $57.55 billion. This is seen by dividing $16.69 by 0.29. For example, Discovery shareholder's 29% stake in the combined value of $57.55 billion is $16.69 billion, its market value today.

Therefore, it follows that AT&T's Warner Media division will be worth 71% of $57.55 billion. That gives it a value of $40.86 billion.

Since we know that there are 7.141 billion AT&T shares outstanding now (see its latest 10-Q), the value of the Warner Media stake will be $5.72 per share. This is seen by dividing $40.86 b / 7.141 b shares.

The Warner Media Deal Value

Now we can take this $5.72 value per share and subtract it from today's price. This is because when the deal closes in mid-2022, the AT&T stock price will automatically fall by the amount of the spin-off. That spin-off value is now equal to $5.72 per share if we assume that the Discovery stock price reflects its value.

This means that the post-transaction price of AT&T stock is now $19.38 (i.e., $25.10 minus $5.72).

Therefore, the new lower dividend yield will be equal to $1.15/$19.38, or 5.93%. As I wrote last time, this is actually lower than the company's historical 6.4% dividend yield.

So, it is possible the stock price may have to fall to $18.00 per share, or $23.72 today. This is because if we divide $1.15 by 6.4%, the new price will be about $18.00.

Where This Leaves Investors in AT&T Stock

I hope you can follow all this math. Suffice it to say that the Discovery stock price today implies that AT&T's price is about at full value or slightly overvalued.

And don't forget that this is a very complicated situation. All the details have not yet been explained by the company.

For example, once it is known how much debt and all the forecast revenues of the new Warner Media ' Discovery company, it is possible that the value may be greater than $5.72 per AT&T share.

Nevertheless, as it stands now, the price of Discovery stock implies that AT&T stock is now fully valued and perhaps even overvalued.

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This is not financial advice and you should not rely on my analysis to buy or sell any stock or crypto, as I am not undertaking to induce you to buy or sell securities. I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.

This represents my analysis of AT&T and Discovery stocks and it is not meant to provide you with specific advice in your own situation. I do not presently own AT&T or Discovery stock or related securities, but I may buy some of these in the coming weeks.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ
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