About seven years after embarking on a bold new strategy to transform itself into a media company, AT&T is months away from becoming a phone company again. But merely selling off its media assets -- and getting very little in return -- won’t solve all of the telco’s problems, says MoffettNathanson senior analyst Craig Moffett.
AT&T spun off DirecTV to TPG last year, in a deal that valued the satellite TV giant it bought for $65 billion in 2015 at about $16.5 billion, and is nearing the finish line in its spin off of WarnerMedia to Discovery Inc., a deal that will net AT&T $48 billion in cash and give its shareholders a 71% stake in the new entity. In a research report Thursday, Moffett wrote that although it's about time AT&T acknowledged its media experiment was a horrible mistake, merely selling off those assets won’t get it out of the hole the company has dug for itself.
Taking a look at AT&T’s share performance over the past five years is a big indication of how dalliances with media have mostly had one effect -- seriously eroding value.
Investors weren’t really pleased when AT&T said it would buy DirecTV back in 2015, driving the stock down about 6% from $36.38 per share when the deal was announced on May 18, 2014 to $34.29 each when it closed on July 24, 2015. But despite paying a hefty price for DirecTV just as the satellite TV provider was beginning its downward spiral (it would lose about 7 million subscribers over the next seven years). AT&T managed only to slightly underperform the S&P 500, lagging that index by about 3.6%, according to Moffett. But when AT&T doubled down on media and announced a $100 billion deal to buy Time Warner on October 22, 2016, the real slide began. For the next four and a half years, according to Moffett, AT&T stock trailed the S&P 500 by more than 100 percentage points.
So, it would seem logical that if investors hated AT&T as a media company, they’d love it when it finally unwound that whole mess, right? Not a chance. Since announcing the TPG deal in February 2021 and the WarnerMedia Discovery deal in May 2021, AT&T stock has underperformed the rest of the market by 29%, per Moffett. Over the full seven-year period, AT&T lagged the S&P 500 by 176 percentage points, making it one of the worst performing stocks in the index over that time frame.
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In his report, Moffett said there are two conclusions to take from that “soul-crushing trip down memory lane:” One, that the underlying telecom business was shaky to begin with; and two, that “the damage from the two acquisitions can’t be undone simply by selling them off.”
At the heart of AT&T’s problems are its debt, currently at about $153 billion as of December 31. According to Moffett, the DirecTV deal was less a sale than a leveraged recapitalization, so it won’t have much effect on its debt load. The WarnerMedia merger, expected to close in the second quarter, will pump about $48 billion in cash into AT&T’s coffers at least partly to pay down debt. But even after that cash infusion, AT&T will have obligations of well over $100 billion.
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While other companies have carried huge debt loads while managing growth businesses -- the cable industry for one -- Moffett’s biggest fear is that the wireless business, which will account for the majority of AT&T’s total business, isn’t growing as much as it used to.
AT&T added about 884,000 postpaid wireless customers in Q4, but the majority of those gains have been won through deep, deep discounting. And customers that sign on for a free handset or free months of service tend to go away when they see another promotion elsewhere.
Also: AT&T and TPG: There is No Why
According to Moffett, AT&T service revenue was up about 3.2% in Q4 while operating revenue rose about 4.2%. Back out WarnerMedia, video and Vrio (its Latin American operation sold to Groupo Werthein in November) and operating revenue grew 1% and service revenue was down 0.3% in the quarter.
Cash flow in the new core businesses also will be hit hard by the DirecTV and WarnerMedia sales. Moffett wrote that AT&T’s pro forma organic EBITDA growth in Q4 was 0.0%.
“Investors might be forgiven for their lack of celebration about stripping to this particular core of assets,” Moffett wrote. ■
