| Item 7.01 | Regulation FD Disclosure. |
As previously announced, on May 17, 2021, AT&T Inc., a Delaware corporation (“AT&T”), and Magallanes, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Spinco”), entered into certain definitive agreements with Discovery, Inc., a Delaware corporation (“Discovery”), and Drake Subsidiary, Inc., a Delaware corporation and wholly owned subsidiary of Discovery (“Merger Sub”), including (1) an Agreement and Plan of Merger (the “Merger Agreement”), by and among AT&T, Spinco, Discovery and Merger Sub, and (2) a Separation and Distribution Agreement (the “Separation Agreement”), by and among AT&T, Spinco and Discovery. The definitive agreements provide for a transaction (collectively, the “Transaction”) pursuant to which, subject to the terms and conditions of the agreements, (i) AT&T will transfer the business, operations and activities that constitute the WarnerMedia segment of AT&T, subject to certain exceptions as set forth in the Separation Agreement (the “WarnerMedia Business”), to Spinco (the “Separation”), (ii) following the Separation, AT&T will distribute to its stockholders all of the shares of Spinco common stock held by AT&T by way of either a pro rata dividend (i.e., a spin off) or an exchange offer (the “Distribution”), and (iii) following the Distribution, Merger Sub will be merged with and into Spinco, with Spinco as the surviving entity and a wholly owned subsidiary of Discovery (the “Merger”). Following the completion of the Merger, holders of the shares of AT&T common stock (as holders of Spinco common stock immediately following the Distribution) will own approximately 71% of the outstanding capital stock of Discovery on a fully diluted basis (computed using the treasury method).
On February 1, 2022, AT&T issued a press release in connection with the Transaction, as further described in Item 8.01 below. A copy of the press release is furnished as Exhibit 99.1 hereto and is incorporated herein by reference.
The information in this Item 7.01, including the exhibit attached hereto, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing by the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filing.
On February 1, 2022, AT&T announced that its board of directors has determined to structure the Distribution as a spin-off rather than an exchange offer. In the spin off, the holders of AT&T common stock would receive a pro rata dividend of all of the shares of common stock of Spinco, which would own all of AT&T’s interests in the WarnerMedia Business following the Separation. The closing of the Transaction, including the occurrence of the Separation and Distribution, remains subject to satisfaction of certain conditions set forth in the Merger Agreement and the Separation Agreement, including obtaining all necessary regulatory approvals.
Additionally, on February 1, 2022 AT&T announced that, following the completion of the Transaction, AT&T expects to pay an annual dividend of $1.11 per share of AT&T common stock, or approximately $8 billion in aggregate, reflecting a target dividend payout ratio in the first full year after close of the Transaction of 40%. AT&T expects that the annual dividend per AT&T share will be resized from $2.08 to $1.11 to account for the distribution of the WarnerMedia Business to AT&T stockholders and support AT&T’s plans to step-up investment in its growth areas of 5G and fiber.
Dividend payout ratio is total dividends paid divided by free cash flow. Free cash flow is a non-GAAP financial measure that is frequently used by investors and credit rating agencies to provide relevant and useful information. Free cash flow is cash from operating activities plus cash distributions from DIRECTV classified as investing activities, minus capital expenditures. Due to high variability and difficulty in predicting items that impact cash from operating activities, cash distributions from DIRECTV, and capital expenditures, the company is not able to provide a reconciliation between projected free cash flow and the most comparable GAAP metric without unreasonable effort.
Cautionary Statement Concerning Forward-Looking Statements
Information set forth in this communication, including financial estimates and statements as to the expected timing, completion and effects of the proposed transaction between AT&T, Spinco, and Discovery constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These estimates and statements are subject to risks and uncertainties, and actual results might differ materially. Such estimates and statements include, but are not limited to, statements about the benefits of the transaction, including future financial and operating results, the combined Spinco and Discovery company’s plans, objectives, expectations and intentions, and other statements that are not historical facts. Such statements are based upon the current beliefs and expectations of the management of AT&T and Discovery and are subject to significant risks and uncertainties outside of our control. Among the risks and uncertainties that could cause actual results to differ from those described in the forward-looking statements are the following: the occurrence of any event, change or other circumstances that could give rise to the termination of the proposed transaction; the risk that Discovery stockholders may not approve the transaction proposals; the risk that the necessary regulatory approvals may not be obtained or may be obtained subject to conditions that are not anticipated; risks that any of the other closing conditions to the proposed transaction may not be satisfied in a timely manner; risks that the anticipated tax treatment of the proposed transaction is not obtained; risks related to litigation brought in connection with the proposed transaction; uncertainties as to the timing of the consummation of the proposed transaction; risks and costs related to the implementation of the separation of Spinco, including timing anticipated to complete the separation, any changes to the configuration of the businesses included in the separation if implemented; the risk that the integration of Discovery and Spinco being more difficult,
