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Understanding the impact of corporate actions is necessary
when contemplating the right investment strategy. This impact is
driven by timely awareness, accuracy, and attention to detail. In
this blog, IHS Markit's Managed Corporate Actions™ will discuss
some of the most dominant corporate actions announced each month
and the roles they take in the marketplace.
AT&T and Discovery's Upcoming "Warner Bros.
Discovery"
Since May 2021, AT&T Inc. and Discovery, Inc. have made
several announcements regarding their definitive agreement to
combine AT&T WarnerMedia's premium entertainment, sports and
news assets with Discovery's leading nonfiction and international
entertainment and sports businesses to create a premier, standalone
global entertainment company.
According to the terms of the agreement, the transaction is
structured as an all-stock Reverse Morris Trust, where AT&T is
set to receive approximately $43 billion in a combination of cash
and debt securities. Upon completion, it is expected for AT&T's
shareholders to receive stock representing 71% of the new company,
while Discovery shareholders with only about 29%. Finally,
announced on June 1st, 2021, that new company will be named "Warner
Bros. Discovery" which is expected close mid-2022.[1]
So, what does a Reverse Morris Trust (RMT) mean and
how does it work?
Similarly to what we saw General Electric Company (GE) and
Westinghouse Air Brake Technologies Corporation (Wabtec) attempt in
2018-2019, AT&T is scheduled to spin off its WarnerMedia assets
into a new company (SpinCo) while simultaneously merging with
Discovery (Merger Sub). Throughout it all, the deal is intended to
remain tax-free for both AT&T and Discovery shareholders so
long as AT&T stockholders maintain at least 50.1 percent of the
stock by vote and value of the combined Warner Bros. Discovery.
Were GE and Wabtec able to pull it off the
RMT?
In summary, No. But for reasons expected. Ultimately, GE altered
a few plans since the time of announcement and took the road that
brought about $3.4 billion in cash to help pay down more than its
$100-billion-dollar debt.
Upon completion of the Merger Agreement, GE shareholders ended up
as the minority owner of the combined company, resulting in the
ineligibility of the Reverse Morris Trust transaction and therefore
led to the taxation on the Spin Off distribution to GE
shareholders.
Where does the deal stand today?
The deal is expected to be approved in the first half of 2022
and close mid-year, subject to Discovery shareholders' approval.
Although AT&T shareholders are set to retain about 71% of the
new company, a percentage well over GE's original shareholders
intention at 51%, there are many different factors that account for
the results of higher profile transactions.
Our
Managed Corporate Actions Experts will continue to monitor all
future announcements to ensure the most accurate and reliable
corporate actions data coverage.
NVIDIA Corp - Stock Split or Stock
Dividend?
On May 21st, 2021, NVIDIA's Board of Directors declared a 1:4
Split of NVIDIA's common stock in the form of a Stock Dividend to
make stock ownership more accessible to investors and employees.
The distribution is pending Shareholder approval at the company's
2021 Annual Meeting on June 3rd.
In terms of timeline expectations, trading is expected to begin
on a stock split-adjusted basis on July 20th for NVIDIA
stockholders on record at the close of business on June 21st, 2021.
Considering US' settlement trade cycle plus the ratio amount in
play, it is evident that Interim Accounting is applicable and a Due
Bill Redemption Date will be supplied.[2]
Many industry experts will argue that the distinction between
Stock Split and Stock Dividend doesn't matter - operationally
speaking, holders are receiving additional shares in both
scenarios. However, in the world of Corporate Actions, we need the
clarity for downstream processing, taxability and accounting
purposes.
So how does the marketplace determine the proper
event type for these types of distributions?
IHS Markit's Managed Corporate Actions (MCA) created a 1:4 Stock
Split to recognize the event and subsequently received several
customer inquiries regarding the event type due to the ambiguous
language in the company announcement. MCA relied on U.S. market
practice, company intent and event mechanics to draw the
distinction:
When following general threshold guidelines, this event is
considered a Stock Split as the distribution is greater than
25%:
Stock Dividends: A distribution < 25% additional shares of
the same security; entitlement based on the Record Date.
Stock Splits: A distribution of > 25% additional shares from
the same issuer; entitlement based on the Record Date.
Spin-Off's: Distribution of a separate entity's security, the
ratio based on shareholders underlying holdings.
Finally, the intent of the company is to make stock ownership
more accessible to investors… i.e. more affordable. A Dividend is
issued when a company is distributing profits in the form of cash
or stock, typically around 5% of the market price or lower, not
300% as seen with the NVIDIA distribution.
Historical analysis shows that almost all BioPharm and
Pharmaceutical companies undergoing a merger will provide
shareholders with a Contingent Value Right (CVR). These CVRs
represent one of the products in their portfolio that has not yet
met its full potential in terms of Sales and Profits. The
pharmaceuticals which these companies create requires years of
research, development, and expenses to release them within the
market, which as a result, comes out of the pocket of the original
shareholders and their stock price. Before the agreement can come
to a close, the acquired company will negotiate the terms of the
CVR and its corresponding milestones in terms of the number of
sales it would need as well as the dates it needs to reach them by
or else… the CVRs expire worthless.
How does this correlate to the world of Corporate
Actions?
The methodology in which these BioPharm and Pharmaceuticals
announce their transactions is through the term of a 'Reverse
Split.' But what are they really?
MCA's Subject Matter Experts realize that the true corporate action
taking place is in fact a Reverse Merger. Since the new company on
a Reverse Merger has not yet traded before, the firm wants it to
trade at an attractive price range, which is why they use the
Reverse Split concept as a control mechanism within the Reverse
Merger.
It seems that the marketplace sees the word "Reverse", finds a nice
clean split ratio, and dubs the entire transition as a Reverse
Split.
The MCA Way:
While others in the marketplace set up two events to reflect the
entire Reverse Merger transaction- one Reverse Stock Split followed
days later by a Spin Off with a Record Date in the past to reflect
the CVR distribution— they are missing the true content of what
is going on here. MCA will instead create a Merger event. Within
the Merger, the payouts will reflect the new company shares payout
as well as the CVR distributions since the entire transaction
happens in one sweep under a business combination.
Posted 30 June 2021 by Madhu Ramu, Managing Director, Corporate Actions, S&P Global Commodity Insights
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