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Why AT&T Stock Fell Today

By Joe Tenebruso - May 17, 2021 at 9:10PM

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A spinoff of a major business could force the telecom giant to cut its dividend payout.

What happened 

Shares of AT&T (T 0.00%) declined by 2.7% Monday after the telecommunications leader said it would merge its WarnerMedia operations with Discovery (DISCA) (DISC.B) (DISCK) to form a new stand-alone company.

So what

Under the terms of the deal, AT&T would receive $43 billion in cash and debt, and its shareholders would receive 71% of the new entity. Discovery shareholders would own the remaining 29%.

The combined company would be an entertainment powerhouse, with valuable content from the likes of HBO, CNN, TNT, TBS, HGTV, and Food Network. It's forecast to generate $52 billion in annual revenue and $14 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) by 2023.

A person is pointing to a stock chart that rises sharply and then falls.

AT&T's stock sold off after rising earlier in the day. Image source: Getty Images.

The merger would allow WarnerMedia and Discovery to accelerate their streaming initiatives centered on popular platforms HBO Max and discovery+. Management also expects the combination to create at least $3 billion in annual cost savings.

The transaction is projected to close in mid-2022, subject to shareholder and regulatory approval.

Now what 

The deal would allow AT&T to pay down its heavy debt load. It would also be able to ramp up investments in key growth areas, such as 5G and fiber broadband.

However, AT&T said it would reduce its dividend payout to shareholders following the closing of the transaction. That news likely outweighed the initial excitement about the deal. Many income-focused investors own AT&T's stock largely for its sizable cash payout, and they may be less willing to hold their shares due to the likelihood of a dividend cut.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool recommends Discovery (C shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

AT&T Inc. Stock Quote
AT&T Inc.
T
$18.43 (0.00%) $0.00
Warner Bros. Discovery, Inc. Stock Quote
Warner Bros. Discovery, Inc.
DISCK
Warner Bros. Discovery, Inc. Stock Quote
Warner Bros. Discovery, Inc.
DISC.B
Warner Bros. Discovery, Inc. Stock Quote
Warner Bros. Discovery, Inc.
DISCA

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