Andrew Bary
Spin or split?
That is the decision that $AT&T(T.US)$ faces as it considers what do with a 71% stake in $探索频道-A(DISCA.US)$ that it will receive when it merges its WarnerMedia business with Discovery in a deal that could close early in the second quarter.
UBS analyst John Hodulik wrote in a recent note that he believes AT&T "is leaning toward a split of the asset"--an exchange of AT&T stock for shares in Discovery, which will change its name to Warner Brothers Discovery. The deal, he added, could be a catalyst for AT&T stock, which has rallied this year after a poor 2021.
AT&T shares are nearly 9% higher, at $27, so far in 2022. Hodulik has a Buy rating and price target of $34 a share on the stock.
A spinoff would be straightforward. AT&T would distribute an estimated 1.7 billion shares of the merged company to its shareholders, who would get nearly 0.25 share of Warner Brothers Discovery for each AT&T share. Such a move would be worth about $7 per AT&T share based on Discovery's recent price of $30. Discovery stock is up over 20% in 2022, making it one the top stocks in the S&P 500.
The other option -- a split-off -- is more complicated. AT&T would offer holders the option of swapping their AT&T stock for Warner Brothers Discovery stock. To entice conversion, AT&T would likely offer its investors a bonus, with Hodulik suggesting a deal of one share for one share.
That would be appealing to AT&T holders since Discovery now trades roughly $3 a share above AT&T stock.
The benefit of a split-off is that AT&T could retire about $45 billion, or 1.7 billion of its roughly 7.2 billion shares outstanding. Hodulik says the AT&T dividend, now 7.8%, likely would be close to 6% in either scenario after the deal based on the company's prior financial guidance.
In a spinoff, the new dividend would be about $1.18 share while it would be around $1.55 a share with a split-off, he estimates. The yield would be slightly higher in a spinoff scenario.
Hodulik sees AT&T as attractively valued at about six times projected 2023 earnings of $4.43 a share in a split-off scenario, a discount to rival Verizon Communications (VZ), at nearly 10 times projected 2023 earnings and a 4.7% dividend yield.
Asked about the spin-versus-split scenario, AT&T CFO Pascal Desroches was noncommittal at a December conference appearance: "We think both are great ways to do -- both a split and a spin are great mechanisms for delivering value. And we're not going to make the decision until we get closer to the time of the separation to ensure that we have complete information, including the relative share prices of the two entities."
Hodulik wrote: "We believe clarity over deal structure and the improved visibility over EPS, FCF (free cash flow), and dividends per share will be a catalyst for AT&T shares, while an exchange structure would enable shareholders to determine their own exposure to Warner Bros. Discovery. We believe AT&T will emerge from this transaction as a leaner, more focused entity better able to invest in its core connectivity businesses."
Write to Andrew Bary at andrew.bary@barrons.com