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AT&T’s ill-fated media play cost it both time and money

Shareholders are likely to feel the pinch next year as the dividend drops

FILE PHOTO: John Stankey, CEO of WarnerMedia poses as he arrives at the WarnerMedia Upfront event in New York City, New York, U.S., May 15, 2019. REUTERS/Mike Segar/File Photo (Mike Segar/Reuters)
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AT&T today is a less valuable, more heavily indebted company than it was in 2016 when it announced plans to acquire Time Warner and create a media-communications colossus that would dazzle consumers and shower investors with riches.

Instead of the “perfect match” that AT&T’s chief executive promised at the time, investors got an ill-fated hookup between two corporate giants that failed to navigate an era of converging technologies and disruptive business models.

Now AT&T’s leadership is back with a new plan: unwinding the deal it once touted as “the model that wins over time.” The company said last week it would spin off its WarnerMedia unit in a complex $43 billion deal that unites it with Discovery Inc. in a new publicly-traded entity.

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John Stankey, AT&T’s chief executive, called the company’s latest transformative transaction “an opportunity to unlock value” — leaving unanswered the question of who had locked up the value in the first place.

While AT&T insists its Time Warner acquisition has paid off financially, many analysts said the telecommunications giant squandered $100 billion on a dalliance with the media and entertainment worlds that could have been better spent elsewhere.

“Telecom companies have no business whatsoever buying assets that are outside their core expertise,” said Allyn Arden, director at S&P Global Corporate Ratings. “This was a business they had no business being in.”

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AT&T’s pursuit of a comprehensive telecom-media-entertainment strategy certainly left investors unimpressed. The phone company’s share price barely advanced during a period when stocks more than doubled in value.

From the announcement of Time Warner’s acquisition to word of its spinoff, shares of AT&T gained just 12.6 percent compared to a 112.7 percent increase in the S&P 500.

The company’s market capitalization — the value of all its outstanding stock — has fallen by about 20 percent since the end of 2016, according to data compiled by Bloomberg.

After bingeing on debt — and eliminating nearly 45,000 jobs — AT&T confronts a future as the nation’s third-largest provider of wireless services and the No. 3 broadband company.

AT&T’s latest reinvention also is bad news for many retail shareholders. The company has long paid a generous dividend, attracting legions of mom-and-pop investors seeking dependable retirement payouts.

But shedding WarnerMedia will shrink annual dividends by nearly half, from about $15 billion to between roughly $8 billion and $8.6 billion, the company said.

AT&T shareholders will own 71 percent of the new Discovery, so they will benefit from its future growth. But many current AT&T investors didn’t sign up for the often bumpy ride of a media growth stock. They want reliable income.

“A lot of holders of AT&T stock are interested in a dividend. The stock is going to be a lot less attractive to that class of individual investors,” said Andrew Jay Schwartzman, senior counselor at the nonprofit Benton Institute for Broadband and Society.

One sign of how widely felt AT&T’s cut will be: The Vanguard Group, which holds the company’s shares in dozens of its mutual funds, including the Total Stock Market Index Fund, the world’s largest single fund, is the company’s top shareholder.

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By AT&T’s calculations, it’s already made billions of dollars on its original Time Warner deal and expects to make even more through the union of Discovery’s reality television programming and WarnerMedia’s CNN, HBO and Warner Bros. Studios.

In the deal with Discovery, AT&T shareholders will get stock in the new company. Based on Discovery’s stock price on May 14, the day before the transaction was disclosed, those shares would be worth $59 billion. AT&T will get $43 billion in cash, securities and WarnerMedia’s agreement to retain $1.5 billion of its debt.

The telecom giant already has booked an additional $5 billion by selling off WarnerMedia assets, including its stake in the streaming service Hulu, plus billions in cash it’s received from the business since 2018.

“We’re comfortably above the $100 billion total value we paid when we bought Time Warner,” said Fletcher Cook, AT&T’s vice president for corporate communications.

Yet Discovery’s stock has sagged roughly 12 percent since the deal was announced — and the transaction is not scheduled to close until the middle of next year — calling into question whether AT&T’s stake in the new Discovery is really worth $59 billion.

AT&T’s math also doesn’t include the opportunity cost of spending $100 billion on TimeWarner rather than alternatives, such as building out the wireless network needed for an Internet-of-things future.

Limited by the debt it had taken on in the original Time Warner deal, AT&T this year was outspent by Verizon nearly 2-to-1 when the federal government auctioned off mid-band spectrum for 5G networks. As rival Verizon committed $53 billion, AT&T could muster only $27 billion for a contest that will be critical to its future.

“If they didn’t have DirecTV and WarnerMedia, they would have gone full throttle on C-band and spent closer to $50 billion. They were hamstrung,” Arden said.

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For AT&T, the about-face on WarnerMedia marks a significant strategic shift after decades of buying and selling other companies.

The corporate saga began in 1984, when the original Bell system was split into the long distance provider AT&T and seven regional phone companies.

More than a decade later, after Congress passed landmark legislation designed to fuel competition among landline, wireless and media companies, AT&T began a series of acquisitions that slowly reassembled much of what had been broken up.

In 2015, it acquired DirecTV before announcing plans to snap up Time Warner the following year. That purchase was delayed when the Trump administration launched an unsuccessful legal challenge on antitrust grounds.

“AT&T has been an acquisition machine for decades. It’s been instrumental to their growth,” said Scott Cleland, president of Precursor, a research consultancy. “Eventually, that strategy ran out of gas.”

Many analysts say the company would have been better off never having gotten involved with Time Warner or DirecTV, the satellite operator it acquired in 2015 for $67 billion. The strategy of owning both media and telecommunications businesses under a single corporate roof, they say, was ill-conceived.

“AT&T is probably getting out of this, at best, break-even or slightly better than that,” said David Barden, senior telecom analyst for Bank of America.

AT&T’s move comes just two weeks after Verizon unloaded its media assets, Yahoo and AOL, in a $5 billion sale to Apollo Global Management, a private equity firm. But Verizon’s media mistake was far less expensive: It spent just $9 billion to acquire the two fading Internet-era stars in 2015 and 2017, at a fraction of what AT&T spent.

AT&T belatedly recognized that making a global success of HBO Max against fierce competition from Netflix and Disney Plus would have required daunting investments. Facing a choice between doubling down and getting out, the company blinked.

“They decided their core competency was connectivity not content,” said Barden, who thinks management made the right call.

As investors mulled the outlook for AT&T and the new Discovery-WarnerMedia combination, it was clear that AT&T has been forced to abandon its ambitious plans and retreat to its roots as a communications company.

Yet AT&T may finally have stumbled onto a promising strategy, as the Discovery deal addresses some of its acknowledged weaknesses. Executives plan to devote all of the $43 billion raised by the WarnerMedia spinoff to shrinking the company’s debt load, which has grown to $169 billion.

That should accelerate ongoing debt reduction efforts by one year and free up the company to increase spending on its wireless network and to more than double to 30 million homes its fiber broadband connections, executives said.

In the short run, AT&T stock may be depressed as dividend-seeking retail investors sell. But eventually, professional fund managers who in the past have been underwhelmed by the company’s strategy and repelled by its high debt load will be attracted to the new plan, Barden said.

“AT&T bit off more than they could chew,” said Jeff Kagan, an industry consultant. “But it remains a powerful, strong company.”