If AT&T Does An Exchange Offer The Stock Will Fall Again

Mark Hake

AT&T stock is likely to keep falling if AT&T makes the upcoming WarnerMedia / Discovery distribution an exchange offer rather than a spin-off

AT&T (T) stock may not have bottomed out recently at $22.17 on Dec. 15. This is despite the company’s proposed dividend cut next year. The issues with the upcoming spin-off/merger are making things highly uncertain. As a result, T stock has been struggling in the past three months. It is still down $3.41 to $24.19 as of Dec. 20’s close from a recent peak of $27.40 on Sept. 29.

The truth is the company has not provided any substantial update to shareholders about the proposed dividend cut. In fact, they are ignoring the issue.

In a recent update for its shareholders on Dec. 7 from the company’s CFO, Pascal Desroches, the issue of the dividend cut was not even brought up.

Since then AT&T has announced the payment of another 52 cents quarterly dividend (i.e., $2.08 annually). This gives T stock an annualized dividend yield of 8.6% at Monday’s closing price of $24.19 per share.

But, as I have pointed out in the past, the dividend is likely to be cut to about $1.15 per share annually (although it is not clear exactly how much yet). Therefore, the dividend yield, on a pro forma basis is now likely 4.75%.

The Spin-Off/Merger – Warner Bros. Discovery

However, this is not exactly the case, as the company is also planning on distributing or exchanging its WarnerMedia assets, in a combination with Discovery Inc. (DISCA, DISCB, DISCK). That spin-off/merger company will be called Warner Bros. Discovery (WBD).

The value of the WBD distribution will lower the price of AT&T. This will, in effect, raise the dividend yield, as I have pointed out in earlier articles.

On Nov. 18, Discovery filed a first registration statement concerning the agreement with Discovery. This is interesting since it was not an AT&T S-4 or S-1 filing. On Nov. 19 AT&T wrote to its shareholders and acknowledged the Discovery filing and said that the deal will likely close by the middle of 2022.

Now on top of that, the S-4/S-1 filing did not make anything clear about the dividend payment for AT&T shareholders. Though to be fair, there was no reason why it would, since the WBD filing is not about AT&T’s policy after the spin-off/merger with Discovery (i.e., the WBD deal).

Moreover, I also found it interesting that the Nov. 18 filing makes it clear that AT&T’s leadership has not even yet decided how the new WBD shares will be distributed.

They seem to be on the fence trying to decide whether the shares of WarnerMedia (from AT&T) combined with Discovery, Inc. should be a traditional spin-off or not. If not, the company was trying to decide whether there would be an “exchange” offer. That is, you will have to give up all or part of your shares in AT&T in order to receive the WBD shares.

The Dividend Effect from WBD for T Stock Investors

I can imagine that this is going to go down very hard with some shareholders. Why should they have to decide to give up their AT&T shares just to get the subsidiary shares of WarnerMedia (albeit it will be combined with Discovery)?  To some, this might appear a choice they should not have to have.

In fact, if the company proceeds down this path, then by owning WBD shares, you would not get to continue to receive any AT&T dividend. That is, to the extent you gave up your T stock to receive WBD shares, your ownership in AT&T would fall.

That is why I suspect most investors would prefer that the company simply spin off the WBD shares, rather than make them an exchange offer.

Moreover, the new registration statement does not indicate whether the new WBD company will pay a dividend to its shareholders. One thing is clear, however. WBD will make a $30 billion payment to AT&T.

What to Do With T Stock

There could be another leg down in AT&T stock if it becomes clear that you have to give up your AT&T shares just to get WBD stock. That is, instead of a spin-off, the company does an exchange offer.

The reason is most investors won’t want to give up their dividend-paying stock, even though the dividend is going to be cut by some uncertain amount.

AT&T management needs to make all of these issues much more clear. I suspect that someone will probably file a lawsuit if the distribution is anything other than a spin-off of WBD shares. That will also make things more difficult for both management and shareholders.

Also, don't forget to fully "Follow" me and make sure to download the Newsbreak app to become a Registered Follower. This way you can also see all my articles in the past. Click on the Follow link underneath my profile name.

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This is not financial advice and you should not rely on my analysis to buy or sell any stock, security, 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 stock (T) and it is not meant to provide you with specific advice in your own situation. I do not own this stock or related securities or options but I may buy them in the near future. Your own situation could be different and this is not a recommendation to purchase the stock.

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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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