It didn’t work. It was misguided. It never really made sense to begin with. And we’re not talking about Quibi.
AT&T’s decision to split out WarnerMedia comes less than three years after closing its $100 billion transaction, including debt, is an admission that putting a large content asset with a wireless phone company had few long-lasting synergies. If anything, WarnerMedia became an albatross on AT&T shares, which have underperformed Verizon and T-Mobile since the deal’s completion date on June 14, 2018.
AT&T CEO John Stankey also sold a 30% stake in DirecTV and other linear pay-TV assets in February, along with operational control, to TPG. That deal also partially unwound a major AT&T acquisition from just a few years earlier. AT&T spent $67.1 billion, including debt, on DirecTV in 2015.
Stankey was former AT&T CEO Randall Stephenson’s right-hand man. He had defended the DirecTV and the Time Warner acquisitions in the past.
But his actions signal something that his words have not: both deals haven’t worked.
Here’s what Stephenson said about why AT&T should buy Time Warner right after the deal was announced in 2016.
“Why put the two companies together?” Stephenson said. “The world of distribution and content is converging, and we need to move fast, and if we want to do something truly unique, begin to curate content differently, begin to format content different for these mobile environments — this is all about mobility. Think DirecTV Now, the new product we’re bringing to market. What can you do with Time Warner content really fast and very uniquely for our customers? Can you begin to integrate social into that content? Can you give the capability to … I’m watching content, I want to clip it, I want to send it via social media to my friends. Can we iterate on that quickly, and can we give a unique experience to our customers?”
Whatever he was talking about there never happened. Instead, here’s what has happened.
Media companies have realized that linear pay-TV is a slowly dying business. That’s why Stankey partially unloaded DirecTV, a linear pay-TV distribution business.
Media companies have attempted to counteract the loss of pay-TV subscribers with direct-to-consumer services that allow users to pay for access to content without subscribing to cable. This has turned entertainment giants into distribution platforms, themselves, a la Netflix.
After running WarnerMedia for about two years, Stankey clearly concluded AT&T was at best not necessary as an owner of media assets and at worse holding the wireless company and the media business back.
“My job as the CEO of AT&T is to turn out to the employee body, who all have good ideas on how to grow this business and where to take it, and make sure I facilitate those opportunities,” Stankey told reporters Monday. “Looking out over the next couple years on these great growth opportunities we have at AT&T, whether it’s fixed broadband, what we do in wireless and what we can do in growing the media business, it became clear to me that we were going to need a different capital structure to get that done. It was important that I not do something in my decision-making that caused anyone to slow down in their execution.”
Stankey went on to acknowledge that instead of supercharging WarnerMedia, as Stephenson had hoped, AT&T was actually holding WarnerMedia back.
“Streaming has evolved in the last couple of years,” Stankey said. “The global opportunity from a shareholder accretion perspective is far greater to seize that opportunity on a stand-alone basis than it is to continue to work on improving our domestic connectivity business.”
In other words, Stankey said adding Discovery’s content and giving WarnerMedia flexibility to spend billions on content was better for AT&T than any benefits WarnerMedia provided AT&T wireless.
That’s as clear of an acknowledgement as possible that Stankey concluded vertical integration wasn’t helping AT&T shareholders.
While Stankey said he decided in recent months that WarnerMedia needed a new capital structure to better compete against rival streaming services, prompting the deal with Discovery, he seriously started to consider extracting WarnerMedia from AT&T after activist hedge fund Elliott Management took a stake in the company in 2019 and publicly chastised management in a letter, according to people familiar with the matter.
At first, Elliott believed Stankey was part of the problem, assisting Stephenson in deals that moved AT&T away from its focus on wireless. But after expediting Stephenson’s retirement and helping run a search for a new CEO, Elliott came to believe Stankey was actually the right man for the job, said three of the people, who asked not to be named because the discussions were private.
Stankey told Elliott privately he was his own man — not a Stephenson clone — and would come to his own viewpoints about the value of DirecTV and WarnerMedia. After running a months-long wide search for a new CEO, Elliott decided it would take a chance on Stankey being a man of his word.
Stankey began to meet with financial advisers to discuss a transaction in September, according to people familiar with the matter. Reaching a deal with Discovery has allowed the new company to have one class of stock — giving the merged entity flexibility to buy other media assets or sell to an even larger company down the road.
Even Elliott was surprised with Stankey’s speed and willingness to take its advice on rationalizing the AT&T portfolio, noting he used phrases Monday such as “focuses our management team” and “simplifying AT&T’s investment thesis” that nearly replicate language from the hedge fund’s letter, the people said.
Stankey also impressed Discovery shareholder John Malone on his willingness to be shareholder friendly with his decisions, another person said.
“It has been a transformational year at AT&T since John Stankey took over as CEO, and today’s announcement represents another impressive step in the company’s recent evolution,” Elliott said in a statement. “AT&T has now executed on its promise to streamline operations and re-focus on its core businesses, all while improving operational execution, enhancing its financial position and advancing its corporate governance. As investors, Elliott supports AT&T in its efforts to best position the company for future success.”