By Drew FitzGerald
Back when AT&T Inc. was mostly a telephone company and John
Stankey was still rising through its upper ranks, he and other
executives considered several potential acquisition targets.
They looked at CBS, Scripps' cable channels and even Twitter
before deciding most of the options were too small, according to
people familiar with the deliberations. AT&T was searching for
a bigger audience.
The company found it in Time Warner. The roughly $85 billion
cash-and-stock deal, along with the preceding purchase of satellite
operator DirecTV, turned AT&T into the world's second-biggest
movie studio behind Walt Disney Co. and a top pay-TV provider. The
deals also made AT&T the most indebted nonfinancial
company.
Now Mr. Stankey, who took over as chief executive this summer,
is working to convince investors that the deal making executives
pursued to fortify AT&T in lean times won't end up weighing it
down. The CEO urged patience in a recent interview with The Wall
Street Journal, saying that some of the company's bets will take
years to pay off but were the right choices long-term.
AT&T's Warner Bros. studios can't churn out movies and TV
shows as quickly as it did before Covid-19 hit. Big movie releases
like "Tenet" and "Wonder Woman 1984" have been delayed. Customers
continue to flee pay-TV as they flock to cheaper streaming
platforms. And AT&T's much-hyped competitor to Netflix, HBO
Max, is off to a slow start. The company's telephone rivals have
meanwhile been bulking up their wireless businesses through
acquisitions.
Shares are down 27% so far this year, leaving AT&T on the
sidelines of the stock market's record run. The company's roughly
$205 billion market value is about $25 billion less than its worth
before it acquired Time Warner, in a deal that was delayed for
nearly two years by an antitrust challenge.
But deal making is in AT&T's DNA, and Mr. Stankey said
recent results have done nothing to change that. He called deals
the first step in a "wash-repeat cycle" that company leaders have
used effectively for decades to build a constantly evolving cash
generator.
"The balance sheet has always been used as a strategic tool,"
Mr. Stankey said. There are "times when you choose to use it for
what it's there for, which is to extend it a bit to do something
that's opportunistic. Sometimes you walk away from an opportunity,
but you did it knowing that the best bullet you could put in the
chamber was the transaction you did."
Mr. Stankey, 57 years old, moved into the corner office of a
nearly deserted Dallas headquarters on July 1, after the
coronavirus pandemic sent most of the company's more than 200,000
workers home. The crisis forced the new boss to devote more time
each week to the basics of keeping employees protected while they
shoot TV shows, install internet lines and staff retail stores.
Most of the carrier's more than 9,000 shops have since reopened,
though sales of new smartphones have plummeted. The Warner Bros.
studio productions that are shooting again must now take expensive
and time-consuming health precautions. Revenue lost from the droves
of satellite subscribers dropping DirecTV service each year is for
now outpacing growth at HBO, the TV brand on which the company is
staking much of its future.
AT&T has said it plans to bundle HBO Max's movies and TV
shows with wireless and broadband packages to keep cellphone users
happy and to attract new home-internet customers. The company has
also told investors it will expand its fiber-optic cable
installations to gain more residential customers, an investment
worth billions of dollars. It plans to keep spending but would also
welcome more government support, Mr. Stankey recently wrote in
Politico.
AT&T has said it still has the resources it needs to keep
hauling in billions of dollars of cash that help support its rich
dividend. AT&T stopped buying back its own stock earlier this
year to preserve cash.
Some Wall Street analysts expect the company to continue
refinancing its debt and shedding assets before it cuts its
dividend, which doles out nearly $15 billion to shareholders each
year. It has paid down about $30 billion of debt and bought back
other bonds to reduce its near-term obligations while keeping
dividend payouts intact.
"That dividend is their third rail," said Roger Entner, a
telecom researcher. "AT&T investors expect and rely on the
dividend."
Mr. Stankey is meanwhile scanning business units for potential
divestiture. AT&T has been discussing a potential sale of its
DirecTV business with private-equity firms, the Journal reported in
August. A deal could value the business below $20 billion, or less
than half what AT&T paid in 2015, some of the people said.
Other advertising assets formerly part of the company's Xandr
unit are also on the block, according to people familiar with the
matter. Two years ago, AT&T talked up the prospects of building
a digital advertising business that could rival those of Facebook
Inc. and Alphabet Inc.'s Google. But the company later folded its
ad-sales units back into WarnerMedia, leaving the future of its
separate AppNexus ad exchange in doubt.
"There's nothing that's sacred anywhere in the business," Mr.
Stankey said, referring to the company as a whole. "WarnerMedia is
no exception to that."
Mr. Stankey said Turner's Cartoon Network cable channel, for
example, would become less valuable with every hour viewers spend
watching the same shows on HBO Max. But the company isn't ready to
cut the traditional cartoon channel loose while millions of
families watch it the traditional way.
AT&T's overall show-business turn has warded off some
potential investors. Parnassus Investments, a San Francisco-based
money manager, has invested in Verizon Communications Inc. to take
advantage of its wireless profits while avoiding AT&T. "Media's
just not a great place to be from an investment perspective," said
Parnassus analyst Andrew Choi. "Hollywood's always soaked up as
much capital as possible."
AT&T's annual dividend yield, which reflects the annual
dividend paid per share divided by its price, has surged above 7%
after trading around 6% or lower for most of the past decade. That
high ratio suggests investors aren't confident the stock can keep
growing with the dividend.
That high yield "doesn't make sense to me, and I can only
conclude we must not have carried the day in people believing in
that regard," Mr. Stankey said. "But the decision to get to this
place was a conscious one."
Write to Drew FitzGerald at andrew.fitzgerald@wsj.com
(END) Dow Jones Newswires
October 04, 2020 08:14 ET (12:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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