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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.
$18.43 (0.00%) $0.00
Warner Bros. Discovery, Inc. Stock Quote
Warner Bros. Discovery, Inc.
Warner Bros. Discovery, Inc. Stock Quote
Warner Bros. Discovery, Inc.
Warner Bros. Discovery, Inc. Stock Quote
Warner Bros. Discovery, Inc.

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