What happened
Shares of AT&T (T 1.10%) 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.
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.
