Why AT&T's stock is getting smashed after mega media deal with Discovery

·Anchor, Editor-at-Large
·4-min read

Wall Street is slicing and dicing the investment thesis on AT&T following its blockbuster sale of WarnerMedia to Discovery on Monday, and is coming to the conclusion there is really no reason to be optimistic on the stock in the medium-term. 

Shares of the soon-to-be telco plunged as much as 7% in Tuesday trading as investors questioned the long-term outlook for the company. 

"For AT&T investors, while we view this transaction, and the February announcement that it would sell DirecTV, as positives, we think it will take time for AT&T to recover. AT&T has lost significant ground in both wireless and fiber broadband as it spent time and money building HBO Max," Spartan Capital head of equity research Barry Sine said in a note to clients.  

Sine also voiced concern about AT&T's governance in light of the WarnerMedia flop.

"We note that eight of the 13 board members who went along with both acquisitions are still comfortably ensconced on AT&T’s board. Change apparently came from new CEO John Stankey who evidently tired of trying to defend and manage the telecom/media conglomerate he inherited," Sine said.

AT&T surprised Wall Street Monday by saying it will spin off its media division WarnerMedia — which is bought for $85 billion just three years ago — and merge it with Discovery. The move joins household name media brands such as WarnerMedia's HBO and CNN with Discovery's HGTV, Animal Planet, Food Network, and TLC under one house.

The newly combined WarnerMedia and Discovery would form one of the largest global streaming platforms in direct competition with Netflix and Amazon. Proceeds from the deal for AT&T will go towards paying down a considerable debt-load of more than $160 billion, which will help as the soon to be pure-play telecom giant builds out its 5G network. AT&T is set to receive $43 billion in a combination of cash, debt securities and WarnerMedia's retention of certain debt, according to the press release announcing the deal.

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Discovery President and CEO David Zaslav is set to lead the newly combined company following the close of the transaction, which is expected to take place in mid-2022. The combined company is targeting an annual $52 billion in sales and $14 billion in adjusted EBITDA (earnings before, interest, taxes and depreciation).

Sine added AT&T's dividend cut was unwelcome news, too. 

"AT&T management has said they plan a dividend payout ratio of 40% to 43% on an expected $20 billion in free cash flow, or about $8.3 billion. On the present share base of 7.1 billion shares, that represents a $1.16 per share annual dividend or about 44% below the present $2.08 annual dividend. It remains to be seen if investors will accept the resulting 3.7% yield, down from the present 6.6%," calculated Sine. 

Other analysts on the Street told Yahoo Finance Live that while AT&T cutting bait on media is a good move considering they couldn't figure the business out, the optics on the deal are tough on the eyes and unlikely serve as a confidence booster for existing management.

"It is rare that you see a management team and a board actually acknowledge so clearly that they made a terrible mistake and that they're willing to undo it. So I actually give them some credit for it. Now it's not to say it doesn't leave behind a tremendous amount of wreckage, right? I mean they spent $175 billion for these assets and then three years later, they are unwinding those positions for what is kind of in theory, i guess, about $80 billion or so. So they destroyed a ton of value, but not many companies are willing to admit they made a mistake right away," MoffettNathanson media analyst Craig Moffett said

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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