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AT&T Pressed on Growth Plans -- WSJ

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09/11/2019 | 02:48am EDT

Investor says company hasn't articulated strategic rationale for Time Warner deal

By Joe Flint and Patience Haggin 

When AT&T Inc. agreed to buy Time Warner nearly three years ago, it promised to create an entertainment and advertising behemoth that could take on Silicon Valley giants like Alphabet Inc.'s Google and Netflix Inc.

Now, the telecom giant is under pressure to deliver.

Elliott Management Corp., the activist investor that disclosed a stake in AT&T on Monday, said in a letter to the company that it has "failed to articulate a clear strategic rationale" for the $80 billion-plus Time Warner acquisition.

AT&T had told Wall Street and regulators that Time Warner -- which was re-christened WarnerMedia -- would help it launch into the streaming-video wars, boost its traditional wireless and pay-TV services and build up an advertising-analytics business that could benefit the TV industry broadly.

But Elliott said that when it comes to direct-to-consumer streaming, there is a "growing sense that AT&T doesn't have a plan," given recent shifts in strategy. And it said the departure of top Time Warner executives leaves the company without necessary media expertise at a critical moment in the industry.

"While it is too soon to tell whether AT&T can create value with Time Warner, we remain cautious on the benefits of this combination," Elliott said. The investment firm called for AT&T to focus more on execution, rather than acquisitions, and divest itself of any noncore assets across its business.

A lengthy antitrust battle with the Justice Department, which only came to a close in February, significantly slowed AT&T's ability to integrate Time Warner. In a statement, AT&T said Monday that it is already executing many of the actions outlined by Elliott.

One of the biggest priorities for AT&T is launching a new direct-to-consumer streaming service to compete with Netflix and other rivals. The company initially laid out plans to offer a three-tiered platform, with an entry-level option focused on movies and additional tiers with the premium HBO Now and Warner Bros. programming. AT&T initially said the service would launch in late 2019.

By this summer, the company had shifted to focus on a single offering, HBO Max. "This quick reversal has intensified the skepticism around WarnerMedia, its OTT strategy and the management of the business itself, " Elliott said.

AT&T now says there will be a limited or "beta" launch late this year, with a broad commercial launch next spring, after rival offerings from Walt Disney Co. and Apple Inc. have already hit the market.

WarnerMedia executives counter that while there have been tweaks to the strategy, it isn't fair to say there is "confusion" and a "lack of plan, " as Elliott claimed. The long antitrust battle against the government slowed the company down, the executives said, and AT&T plans to lay out its strategy at an investor meeting at the end of October.

WarnerMedia has unveiled a large number of original TV shows and movies for HBO Max as well as reacquiring key library content including reruns of the hit comedy "Friends." It hasn't yet announced a price for the service, but it is likely to cost slightly more than the $14.99 average price for HBO Now, a person familiar with the matter has said.

Disney earlier this year said its streaming service, Disney+, would launch in November and cost $6.99 a month. Apple TV+ will cost $4.99 a month starting Nov.1, the company said Tuesday.

After prevailing in the antitrust fight, AT&T moved to break down the corporate walls and fiefs at WarnerMedia, leading to the exits of the top executives at the HBO and Turner divisions this spring. AT&T Chief Executive Randall Stephenson had earlier said he wasn't looking to change the culture of WarnerMedia nor the leadership at key units.

The executive AT&T picked to lead WarnerMedia, John Stankey, has since emerged as the likely successor to Mr. Stephenson.

"For a content business now owned by a telecommunications company and under the direct supervision of a lifelong telecom executive, this lack of continuity in leadership presents a real concern for investors," Elliott said.

While some senior executives such as HBO head Richard Plepler have left the company, WarnerMedia has also brought in new management including Robert Greenblatt, former NBC and Showtime programming chief as chairman of WarnerMedia entertainment.

On Tuesday, WarnerMedia unveiled a new distribution unit for its cable channels -- a continuation of the combining of the HBO and Turner units under one umbrella.

AT&T also said it would upend the $70 billion traditional television-advertising market, using its reams of data -- on everything from its DirecTV subscribers to where its customers take their phones -- to help advertisers target consumers with ads across their TVs and digital devices.

The company's plans put the spotlight on Xandr, the targeted advertising division created when AT&T acquired ad tech marketplace AppNexus for about $1.6 billion in 2018. Cable and satellite TV operators have long promised marketers would be able to target TV commercials to individual homes, but the offering has been slow to catch on. AT&T's plan has faced hurdles, including privacy and regulatory concerns around how telecommunications and broadband providers may leverage customer data.

Meanwhile, the Federal Trade Commission is scrutinizing how AT&T and other internet-service providers use consumer data for advertising. The agency ordered AT&T's advertising subsidiary and other companies to provide information on their privacy practices for user data last month. AT&T said at the time that it would respond appropriately.

WarnerMedia started making significant cuts to its ad-sales division in July.

Elliott's letter called for a full review of AT&T's portfolio, including its advertising assets.

Drew FitzGerald contributed to this article.

Write to Joe Flint at joe.flint@wsj.com and Patience Haggin at patience.haggin@wsj.com

Corrections & Amplifications WarnerMedia started making significant cuts to its ad-sales division in July. An earlier version of this article stated that Xandr made the layoffs.

Stocks mentioned in the article
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ALPHABET -0.68% 1231.63 Delayed Quote.17.86%
APPLE 0.53% 219.9 Delayed Quote.39.41%
AT&T -1.58% 37.31 Delayed Quote.30.73%
NETFLIX 0.05% 294.29 Delayed Quote.9.95%
WALT DISNEY COMPANY (THE) -1.61% 135.8 Delayed Quote.23.85%
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Financials (USD)
Sales 2019 183 B
EBIT 2019 30 553 M
Net income 2019 18 318 M
Debt 2019 156 B
Yield 2019 5,48%
P/E ratio 2019 15,0x
P/E ratio 2020 12,9x
EV / Sales2019 2,35x
EV / Sales2020 2,30x
Capitalization 273 B
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Mean consensus OUTPERFORM
Number of Analysts 28
Average target price 36,65  $
Last Close Price 37,31  $
Spread / Highest target 28,7%
Spread / Average Target -1,76%
Spread / Lowest Target -46,4%
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Managers
NameTitle
Randall L. Stephenson Chairman, President & Chief Executive Officer
John J. Stephens CFO, Principal Accounting Officer & Senior EVP
Joyce M. Roché Independent Director
Laura D'Andrea Tyson Independent Director
Matthew K. Rose Lead Independent Director
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