AT&T: The Biggest Problem With Congress And The Spinoff News

Summary

Congress now has antitrust worries and racial representation concerns with AT&T’s WarnerMedia deal with Discovery.

Further, while many investors believe that spinoffs have a net positive impact on stock prices, the longer-term research is mixed.

Several examples of spinoffs are reviewed, including the performance of a spinoff-based ETF versus the S&P 500 and Nasdaq 100.

Taken as a whole, AT&T is in a difficult situation caused by excessive levels of uncertainty.

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adventtr/E+ via Getty Images “Proposed”

If you’re an AT&T ( T ) investor then you probably know that certain members of Congress are now going after the proposed WarnerMedia Discovery deal . More than 30 Democratic members of Congress are raising concerns about cable programming giant Discovery’s proposed $43-billion takeover of WarnerMedia, owner of CNN, HBO, Cartoon Network, and the Warner Bros. television and film studio. Please allow me to emphasize the word proposed . This is far from over.

As a reminder, T fought hard for a long time to acquire Time Warner. It was a rather tough legal battle . We can look back three years ago to feel the anxiety. “By most accounts, however, the trial has gone very well for AT&T. For the record, we’re still calling it a toss-up, but the general consensus is that we’re being too cautious; most observers seem to give AT&T 75%-or-better odds of winning in Court,” Moffett wrote in a research note. To be clear, Moffett still gives AT&T 50/50 odds of winning. The central point here is that the WarnerMedia Discovery deal appears to be in flux for reasons outside of T’s direct control. That’s never a good thing. After all, the market hates uncertainty more than a bad deal . I’ll revisit all of this in a little while. However, before that, we’re going to look how these deals perform from a high level. Spinoffs On The Surface

I have some good news and some bad news. The good news is that spinoffs can work. They can unlock serious value, often because of concentration and related focus. Less is more. The bad news is that spinoffs may or may not work and there is a lot of uncertainty before, during and after the transaction happens. And, again, the market doesn’t appreciate the unknown .

I think this is the standard view of what happens when there is a spinoff: When the spun-off company starts trading on its own, the share price of the parent company will drop by the value of the new company, now separated from the parent. The lost value will be reflected in the share price of the new company. With the ConocoPhillips spin-off, the company’s stock price closed at $71.63 the day before Phillips 66 started trading. The next day, the stock opened at $55.92 and Phillips 66 shares opened at $33.74. ConocoPhillips issued one Phillips 66 share for each two Conoco shares so the combined value of $55.92 plus $16.87 – half of $33.74 – or $72.79 was pretty close to the before spin-off share price. Intuitively this is quite appealing. The math is simple. However, at the same time, this only provides a snapshot view of action. Investors want to believe good things will happen, like this follow up to the ConocoPhillips ( COP ) and the Phillips 66 ( PSX ) in 2015. Since its first day of trading on May 1, 2012, Phillips 66 has gained over 150%. The stock took a slight dip in the second quarter of 2013, but was able to pick up steam once again towards the end of that year. Since the spin-off, ConocoPhillips has also performed relatively well; though the older, more established company did not log in triple digit gains like PSX did. Overall, both companies seemed to have benefited from the split. Investors often remember these stories. Oftentimes, they’re good, not painful. For example, here’s what’s happened when Abbott Laboratories ( ABT ) spun off AbbVie ( ABBV ). Data by YCharts Clearly the spinoff worked well and both companies have enjoyed strong gains since early 2013. At the same time, happy endings like we see with COP’s spinoff and ABT’s spinoff can mask the truth. We simply don’t know how it’s really going to turn out.

Here’s another example in my own portfolio. IBM ( IBM ) did a spinoff of Kyndryl ( KD ), […]

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