AT&T INC. 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
10-04-20 0814ET
