AT&T Time Warner Merger : What Happened?
AT&T and Time Warner attempted to break down the barriers that exist amongst high-tech sectors through an intersectoral merger in 2018.
This merger was advertised by AT&T executives as highly feasible since the two sectors are intertwined in their makeup. This may have been believed to be true as the two companies are tangentially correlated by the need for high-speed media distribution channels. It is potentially possible that the acquisition of an entertainment company came at a difficult time for the company as it needed to position itself in the newly developed 5G landscape, in conjunction with a CEO change, which may have been overbearing. In fact, it is believed that AT&T rushed the release of HBO Max prior to it being ready. It is unknown if these factors are the reason, but, AT&T has decided to divest in Warner Media and facilitate a merger with Discovery Communications.
Although Warner Media is a standalone strong company with high-quality offerings, they were not able to capitalize on the streaming frenzy that was 2020. While streaming competitors experienced high volumes of new subscriptions, and higher revenues, Warner Media’s total sales declined by 13.66%. HBO Max experienced subscription growth of 19%. A relatively subpar gain in comparison to Prime Video and Netflix which experienced gains of approximately 50% and 25%, respectively. The executive leaders of the newly founded company believe a focus on entertainment will positively impact the company’s performance in the coming years.
Coupled with the potential negative sentiment of the market, which has been recognized by shareholders, a dividend cut will influence many who purchased AT&T stock for its safe 6.5% annual yield. Following the announcement AT&T made it known that it plans on distributing 40 to 43% of free cash flow to its investors. This would be reflective of an $8.6 billion payout. A significant decline from the prior year. Existing shareholders will, however, receive 71% of the newly incorporated company. The remaining 29% will be dispersed to Discovery Communications shareholders.
In addition to the benefits that shareholders will directly receive, AT&T will receive $43 billion in the form of cash, debt securities, and the ability to offload certain debt to the spun-off company. The newly incorporated company will have a beginning debt balance of $55 billion. Overall market sentiment has not been supportive of the decision thus far and has decreased AT&T’s market capitalization by nearly 10%, since May 17th, 2021.
The divestiture from Warner Media marks the second ineffective AT&T media acquisition of the decade. It has been 6 years since AT&T acquired DirecTV at a $44 billion valuation. Since the acquisition subscriptions have fallen 15%. Although the company was purchased at a fair price at 8x EV/EBITDA but immediately caused a $40 billion debt increase for the telecommunications company.
The pursuit of expanding into different sectors has thus far proven to be unsuccessful by AT&T. However, they have now freed up their financial, technological, and time. These are all inputs that will be essential in the unveiling 5G landscape.