In untangling itself from its WarnerMedia holdings with a $43 billion deal with Discovery, AT&T is looking to join Verizon in saying goodbye to Hollywood ambitions. Both telecom giants tried to reap gains from tying content businesses to vast wireless distribution networks. But getting these buys to pay off was more difficult than management expected.
“The simple rule from the past 20 years is that telco and media assets generally do not mix,” argues Ian Whittaker, a London-based finance consultant. “The mindset between the two sides is too different, and it always ends up with the telco companies regretting their purchase.”
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Cowen analyst Colby Synesael says that the Discovery combination will allow AT&T to “unwind much of the company’s vertically aligned strategy it had pursed the last seven years,” which he called “the right decision” as the transaction “simplifies the story and will provide funding to AT&T to further invest in its two remaining connectivity focuses – mobility and fiber.”
Much talk on Wall Street on Monday focused on whether the Discovery deal plan could lead Comcast to make a counter offer for WarnerMedia given the two companies have been mentioned by experts as a good fit. One Wall Street observer who didn’t want to be named said it “will be interesting to see whether leaking it to the press gets Comcast to the table, which is why I presume (AT&T) leaked it.”
CFRA Research analyst Tuna Amobi notes that AT&T’s spin off of WarnerMedia assets like HBO, Warner Bros. and CNN — which it bought for $85 billion in 2018 — is “consistent with its current strategic theme of ‘portfolio simplification’” after selling a 30 percent stake in DirecTV and its other video services, U-Verse and AT&T TV, to private equity firm TPG Capital in February in a deal valued at $16.25 billion. (In 2015, AT&T had bought DirecTV assets for $67 billion, including debt.)
Similarly, after spending more than $9 billion on buying media assets over the past six years, Verizon, under CEO Hans Vestberg, has retreated from the space. In November, Verizon offloaded news outlet HuffPost to rival BuzzFeed to focus on its wireless business. This month, the telecom agreed to sell Yahoo, AOL and the remainder of its Verizon Media brands to private equity firm Apollo Global Management in a $5 billion deal, retaining only a 10 percent stake.
In announcing the deal, Vestberg also highlighted the need for more attention and investment than the telecom firm was able to provide. “Verizon Media has done an incredible job turning the business around,” he said. “The next iteration requires full investment and the right resources.” Instead of owning programming businesses and competing with other content giants, Verizon is teaming with the likes of Disney to offer their brands, such as Disney+, its distribution reach to wireless customers.
AT&T’s debt load of $180.2 billion as of March 31 is a key part of its change of mind on owning media. “AT&T doesn’t have the money to invest in 5G, streaming media, and consumer fiber all at the same time,” MoffettNathanson analyst Craig Moffett says. The Discovery deal will “refocus AT&T on their core telecommunications business.”
Bernstein analyst Peter Supino put it more bluntly in a recent report: “AT&T has too much debt.” And about WarnerMedia, Supino added: “Really, is there any way that the phone company will captain formerly mighty Time Warner to glory in the fragmented, ‘random-access’ media future which scared Jeff Bewkes, Rupert Murdoch, and the Scripps Trust into selling?”
Owning both content and distribution has been seen as out of vogue on Wall Street as many companies have sharpened their focus on more narrowly defined fields of business. The one exception is NBCUniversal owner Comcast, which has kept touting the benefits of vertical integration as it bets on streamer Peacock (and the growth of its Sky TV portfolio internationally. (To note: NBCU expects losses of $2 billion for Peacock for 2020 and 2021.) “TV’s transition from the legacy bundle to Internet distribution has increased capital intensity and to date lowered the returns for all involved,” wrote Morgan Stanley analyst Benjamin Swinburne in a report. “The need for global scale with global brands is clear.”
LightShed Partners analyst Rich Greenfield, meanwhile, reiterated his November assessment that “the hoped-for synergies of vertical integration were ‘fool’s gold,’ as history has shown over and over again.”
