After Media Detour, AT&T Confronts Old Problems

Following its spinoff of WarnerMedia, AT&T is back to primarily being a wireless company, with all of the challenges that entails.,

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At a meeting of AT&T’s top leaders at the company’s headquarters in Dallas, Randall L. Stephenson, the chief executive, sounded a victory note. The wireless provider was on the verge of a transformative deal that would turn the phone company into a tech and media giant.

It was about to take ownership of Time Warner, the entertainment colossus behind HBO, CNN and the Warner Bros. studios. Mr. Stephenson praised his new prize, but also took a moment to take a small jab at the company he was about to acquire, according to two people with knowledge of the matter who spoke on the condition of anonymity to describe a private meeting.

“These guys back in New York,” he said, referring to boldface executives like HBO’s Richard Plepler and CNN’s Jeff Zucker, “they think they’re ball players. They’re not ball players. They’re executives.” The company says Mr. Stephenson never made such remarks.

Five years later, most of AT&T’s top media executives have left or were ousted (though Mr. Zucker remains) and over 2,000 workers have been laid off. And AT&T has decided it can no longer sustain its media ambitions. On Monday it announced it would spin off the business into a new entity that would merge with a rival programmer, Discovery Inc.

Now it is back to primarily being a wireless phone company, with all of the issues that entails. AT&T still faces a crushing debt load of nearly $170 billion, and an expensive build-out of its 5G network, as well as rival carriers who seem to have a jump on the next generation of fast mobile internet service. AT&T will be able to lower that debt after the Discovery deal and it has a healthy wireless business.

In the long history of corporate outsiders thinking they can outsmart Hollywood, this seemed to be another ignominious example.

AT&T declined to comment on the Dallas meeting, but said its ownership made the media business, renamed WarnerMedia, much more valuable. It cut costs while investing billions to introduce HBO Max, a new streaming service that together with regular HBO has over 44 million subscribers. Mr. Stephenson, who retired last year, could not be reached for comment.

Analysts and investors still questioned how AT&T reached this point.

“They did two things wrong,” Craig Moffett, co-founder of the Wall Street research firm MoffettNathanson, said in an interview. “One, the strategy didn’t make any sense, and two, they overpaid.” He added: “You can get by with a mistake on one of those dimensions, but not on both.”

Going back to its core wireless business comes with challenges. The company faces stiff competition from T-Mobile and Verizon. The market for mobile customers is saturated, meaning everyone who wants wireless service already has it. The big three are essentially stealing customers from one another. AT&T will have to prove it can build its network faster and offer it at a better price to keep customers from defecting.

Many observers chalk up AT&T’s latest troubles to two key events: its $67 billion acquisition of the satellite operator DirecTV in 2015 and the Time Warner deal.

“It was a confounding argument from the open, where they were buying into the legacy media business in order to blow up the legacy media business,” Mr. Moffett said. “They made that same argument with DirecTV where they said they were buying it to have the content distribution muscle to blow up the content distribution ecosystem. Why do you buy it to blow it up?”

John Stankey, the head of AT&T and the strategist behind the Warner deal, disputed any characterization that it cost the company money. On Monday, he said it was likely the company would realize over $100 billion in returns, possibly more.

The company’s math goes like this: Altogether AT&T paid $107 billion for Time Warner, which includes debt. But it has taken billions out of WarnerMedia since then.

ImageThe TimeWarner Center in New York.
The TimeWarner Center in New York.Credit…Drew Angerer/Getty Images

It sold off several WarnerMedia assets, including real estate, its stake in Hulu and some European businesses for a total of $5 billion. As part of WarnerMedia’s spinoff, AT&T will be able to shed some $43 billion of debt. That brings it up to $48 billion in returns.

The phone giant’s shareholders will still own a big piece of the new business that will be merged with Discovery. AT&T presumes the new company will be valued based on Discovery’s stock price. Discovery will own 29 percent of the new business and AT&T will own the rest. Based on Discovery’s market value at the close on Friday, Discovery’s stake in the new entity would be worth $24 billion, and AT&T’s would be worth $59 billion.

Taken together, that tallies up to exactly $107 billion. It does not include at least $15 billion in cash flow that AT&T has taken out of WarnerMedia in the last three years. Nor does it include the money it spent on advice for its deal-making binges. AT&T has paid a total of $1.85 billion in advisory fees on deals worth more than $500 million each since 1995, according to Dealogic.

Big caveat: The majority of the return is based on the market value of Discovery, which has lost 6.5 percent of its stock value since Friday. It’s possible Discovery could be worth even less by the time the deal is expected to close by the middle of next year.

In other words, the deal could still be a bust for AT&T.

Mr. Moffett said AT&T appeared to buy things at a premium and sell at a discount. DirecTV, for example, has been bleeding customers for years; in February, AT&T sold part of the business to the private equity firm TPG at a valuation of about $16 billion, a third of what it originally paid.

In many ways, the problem stems from AT&T’s history. The chief architect of the modern-day AT&T is Edward E. Whitacre Jr., a Texas native who started his career as a facilities engineer with Southwestern Bell in 1963 before rising up the corporate chain to create what would eventually become one of the largest telecommunications providers in the country.

Mr. Whitacre’s philosophy, simply, was bigger is better.

He transformed Southwestern Bell, the smallest of the regional Bell telephone operators, into a phone behemoth by gobbling up company after company.

Mr. Stephenson, his successor, then transformed AT&T into a mobile giant. He secured a key deal with Apple in 2007 to become the exclusive provider of iPhone service and the company kept growing.

Mr. Stephenson cast about for ways to increase AT&T’s size and in 2011 he made a $39 billion bid to buy its rival T-Mobile. But after regulatory pushback, he walked away from the deal.

“It would have been an amazing merger,” said David Barden, a senior research analyst at Bank of America. “It would have kind of perpetuated the AT&T juggernaut of growth through acquisition — not through organic — but it failed.”

Mr. Stephenson then looked to the attractive profit margins found in media and entertainment. In 2014, he announced a deal for DirecTV, a transaction that he promised would “redefine the industry.”

But AT&T bought into the pay-TV industry at its peak. Not long after it acquired the satellite service, consumers left in droves.

“One thing they didn’t — they could not have anticipated, was that 2014 was the last year linear video would grow,” Mr. Barden, referring to the cable TV business. “Because who was out there in the wings? This little company called Netflix.” Customers began to cut their cords and cable subscriptions began their descent.

Then came Time Warner. Numerous analysts pointed out that owning a company that makes money by distributing shows and films as widely as possible wouldn’t give AT&T any advantage. In other words, it would still have to license HBO and CNN to rivals like Verizon’s television service, or to cable giants like Comcast. AT&T would have a hard time justifying keeping the content for itself.

The Justice Department sued AT&T to block the deal, but it lost its case in court.

Makan Delrahim, the former Justice Department antitrust chief who oversaw the suit, said in an interview that AT&T’s rampant deal making was a “classic case” of corporate misbehaving. The company “did a series of mergers and acquisitions and really were not rational for their business execution,” he said, “T-Mobile, DirecTV and Time Warner. And this is the result.”

Mr. Whitacre, the founding chief executive of the modern AT&T, offered another view.

“The deals we made while I was chairman — which was a long time — was acquiring the businesses that we were familiar with, the businesses we were in,” he said in an interview. “And when I left, that changed.”

Mr. Whitacre, who is still an AT&T shareholder, said he liked the Discovery deal, getting the company back to “where we came from, if you would.”

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