BLOG — Jun 30, 2021
Untying the Knots: Simplifying Corporate Actions
By Madhu Ramu
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.
Please reach out to our Managed Corporate Actions Experts for more information or questions.
US Reverse Mergers with CVRs: Marketplace Pattern
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.
Please reach out to our Managed Corporate Actions Experts for more information or questions.
S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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