AT&T Redefines Messy as It Slogs Through Its Media Merger

(Bloomberg Opinion) -- AT&T Inc. looks exactly like a business that’s been disrupted by a giant debt-laden merger. Go figure.

There have been so many moving parts at the company lately that they were bound to influence first-quarter results as the company tries to balance the demands of its dividend-hungry shareholders and the need to reduce debt. On Wednesday, AT&T said it generated $44.8 billion of revenue, about $300 million shy of analysts’ average projection, while earnings of 86 cents a share were in line with estimates.

The subscriber exodus continued at DirecTV and DirecTV Now after price increases, with 627,000 customers canceling their subscriptions in the period. Ebitda for the unit, though, climbed for the first time a long time. Buy-one-get-one-free smartphone offers helped AT&T’s wireless business bring in 80,000 new phone customers, but it lost 204,000 subscribers overall because of tablet users. The performance at WarnerMedia, its newly acquired TV-and-movie business that includes HBO, didn’t wow anyone. Shares of AT&T fell 3.3 percent at the opening of trading.

It’s a mixed bag and nothing for investors to get overly agitated about. But to put it all in perspective, here’s what has been taking place at AT&T in just the last few weeks:

• AT&T reorganized the WarnerMedia assets to better align them with the company and its new focus on competing with Netflix Inc. and Walt Disney Co. in streaming. Such changes, of course, create tension among employees, and they led to the departure of two key executives, Richard Plepler of HBO and Turner’s David Levy. The Warner Bros. studio division was at least thought to still be in good hands with Kevin Tsujihara, but then a sex scandal led to his departure two weeks later. AT&T’s now searching for a successor.
• DirecTV went through bitter contract negotiations with Viacom Inc., the parent of MTV and Nickelodeon, over renewing the networks on its satellite-TV packages. It also temporarily dropped them from DirecTV Now, the streaming service. AT&T is looking to save money and boost profitability as its monstrous debt load weighs on the business. But ultimately, not having Viacom’s networks on its services would have sped up subscriber losses too much, so they were able to work out a deal in the end.
• AT&T was sued by Sprint Corp. over its use of the misleading “5G E” icons on certain subscribers’ devices, a suit that was just settled this week. While AT&T says the label stood for “5G Evolution,” it’s foolish to think the company was doing anything other than hoping consumers would think they were already using a version of 5G wireless connectivity. The marketing ploy backfired and is the kind of corporate craftiness that leaves a bad taste in people’s mouths. AT&T should instead be working to improve its image, because the price increases in its video business following a big media purchase that was contested by regulators aren’t a good look either. 
• “Game of Thrones” returned to HBO on April 14, which should boost subscriptions this quarter. But the series has only four episodes left, so it remains to be seen if there’s enough content on the $15-a-month HBO Now service to keep subscribers from quitting until its next hit show. As I wrote last week, fans will miss GoT, but HBO and its new owner will miss the series even more.
• AT&T dropped the NFL Network and Red Zone from its U-Verse TV and DirecTV Now packages. As tensions flare with the National Football League, which is also interested in offering streaming rights, DirecTV’s lucrative Sunday Ticket deal could be in jeopardy. 
• The company is selling both its Hulu stake and Hudson Yards office space in Manhattan to help pay down debt. AT&T says those moves will generate $3.6 billion of cash this quarter. It has $169 billion of net debt and says 75 percent of the debt it took on to buy Time Warner will be paid off by the end of this year. It’d be much easier to do so if AT&T reduced its dividend payments, which will total nearly $15 billion this year. But as this chart shows, the dividend is an attractive feature for shareholders who otherwise may be turned off by the risks of the merger integration:

That’s a lot to take in for one quarter. AT&T CEO Randall Stephenson and his team have their work cut out for them because it’s all still so messy right now. The next step is introducing its version of Netflix and Disney+, though Stephenson provided little information on that during Wednesday’s earnings call.

The company had to wait 857 days for its megamerger to officially clear all regulatory hurdles and become final. But the wait continues to for investors to see if it was all worth it. 

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.

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