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