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US telecoms decide focusing on pipes isn’t so dumb after all

John Stankey, AT&T’s chief executive, was crowing last month about the success of monster movie Godzilla vs Kong at both the box office and in driving audiences to the HBO Max streaming platform, the group’s attempt to challenge Netflix.

This week, he sounded more like a traditional telecoms executive as he outlined the “compelling opportunity” to instead grow his company’s share of the markets for broadband and 5G mobile services.

AT&T on Monday unveiled plans to spin out and merge WarnerMedia, the content business it bought only two and half years ago for a total enterprise value of $108.7bn, with rival Discovery.

The U-turn came only two weeks after its rival Verizon pulled the plug on its own media ambitions, which were born in 2015 when it paid $4.4bn to acquire AOL. Both constituents of the disastrous AOL-Time Warner deal at the turn of the century have been bought and then sold by America’s two largest telecoms companies in quick order.

The telecoms sector has long been fascinated with Hollywood as it has railed against the notion that the industry is little more than a collection of “dumb pipes” that act as conduits for value created by other companies.

Spain’s Telefónica made an ill-fated deal to buy Big Brother creator Endemol at the turn of the century while others have built sports broadcasting business, funded content studios, and acquired TV channels.

Yet telecoms-media convergence often comes at great cost and companies including AT&T and Verizon have embraced the notion that focusing on the pipes may not be so dumb after all.

“It’s like the cicadas. Every 17 years or so, the telecoms companies try to get into the media business,” said Craig Moffett, an analyst at MoffettNathanson, who recalls executives speaking about media opportunities as far back as 1984. Back then, the US telecoms industry was transitioning from a government-backed monopoly into a competitive business with the break-up of the Bell System.

“Telecoms CEOs started to look outside for ‘grass is greener’ opportunities. The sexiest of those was and always will be media,” Moffett said. “But the sexier the business, the worse the returns.”

Steve Case, co-founder of AOL and one of the architects of its $164bn merger with Time Warner, responded to the news of AT&T’s media exit by tweeting “#dejavu”.

Stankey, a telecoms veteran, was the driving force behind AT&T’s acquisition of DirecTV, the satellite TV broadcaster, and Time Warner. In a span of four months, he has unwound a decade of his own media deals — and at a hefty cost to shareholders.

In February, AT&T sold a 30 per cent stake in DirecTV to TPG, the private equity company, and spun it off into a new company valued at $16bn. That was around a quarter of the company’s $67bn enterprise value when it acquired the business six years ago. New Street Research analyst Jonathan Chaplin described the deal as “a humiliating transaction that barely qualifies as a divestiture”.

That was followed in quick succession by the spin-off and merger of WarnerMedia with Discovery in exchange for $43bn of cash and the newly formed company’s retention of debt, as well as a 70 per cent stake in the enlarged company.

John Stankey, a telecoms veteran, was the driving force behind AT&T’s acquisition of DirecTV, the satellite TV broadcaster, and Time Warner. In a span of four months, he has unwound a decade of his own media deals. © REUTERS
Randall Stephenson, former AT&T CEO, had tried to go toe-to-toe with Hollywood producers by acquiring Time Warner, securing an asset that had slipped through the fingers of Rupert Murdoch. © AFP via Getty Images

Combined, these deals destroyed more than $50bn in shareholder value, according to FT calculations.

AT&T’s market capitalisation since October 2016 when it first revealed the Time Warner deal has barely changed at $230bn. Conversely, Disney has more than doubled in value to $150bn.

Stankey was promoted to chief executive of AT&T last year, taking over from Randall Stephenson, who had tried to go toe-to-toe with Hollywood producers by acquiring Time Warner, securing an asset that had slipped through the fingers of Rupert Murdoch.

Jeff Bewkes, the Time Warner chief executive at the time, had seen the incursion from Netflix and set out to sell the company to a deep-pocketed technology group that could cover its content costs in the future.

But it was a fairly short list. Facebook and Google had no interest, while Apple engaged in talks but did not pull the trigger, according to people briefed on the negotiations. Comcast had already bought a media company, as had Verizon. That left AT&T.

Bewkes asked AT&T management if they had enough money to properly invest in a global streaming service, which would entail years of losses, according to a person briefed on the discussions. He never received a clear answer from AT&T, the person added.

That was perhaps a sign that the deal would stretch AT&T to the limit. The deal made AT&T the most indebted company in the world, with $180bn of net debt, and it had already been haemorrhaging subscribers at DirecTV since 2017 as cord-cutting gathered pace.

AT&T’s media exit also cloaked a “rebased” dividend. The cut, which has not yet been quantified, will reduce one of the key attractions of holding the company’s stock: its high dividend yield. The group’s shares dropped 5.8 per cent on Tuesday.

Verizon’s media experiment also cost it billions of dollars. The company spent $9bn to buy and merge AOL and Yahoo, which it pitched as a chance to take on Google and Facebook in digital advertising.

Hans Vestberg, the former Ericsson chief who was developing Verizon’s 5G strategy, was appointed to the top job in 2018 and tried to stem growing losses at the media business. Verizon wrote off the value of its media assets — comprising properties such as Tumblr, The Huffington Post, TechCrunch and Yahoo Sports — by almost $5bn and, having tried to sell it repeatedly, finally engineered a $5bn sale to Apollo this month.

Verizon and AT&T spent almost $70bn between them acquiring C-Band spectrum in February to boost their 5G coverage, providing another trigger for a reconsideration of whether fantasy hockey leagues and the new Space Jam movies were the best use of their cash.

Nick Read, chief executive of Vodafone, said that “we have never believed as a company that we should move into content, telecoms and media have different business models”.

Vodafone, which operates the largest pay-TV business in Germany, has adopted an “aggregator” model whereby it is a neutral platform connecting millions of customers to the broadest array of content it can offer. “If you go into content creation then you have to make a serious financial bet,” said Read.


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