EUR 850.00 For Business Accounts Only

Morningstar | T Updated Forecasts and Estimates from 26 Feb 2019

We doubt that AT&T’s transformation into a diversified media and telecom company will deliver significant strategic benefits, as we don’t believe these industries complement each other well, despite their close association. We expect AT&T will need to reach as wide an audience as possible at WarnerMedia to maintain relationships with content creators and fend off rivals, limiting opportunities to create unique experiences for its telecom customers. In addition, other wireless carriers have already responded to AT&T’s strategy, partnering with Netflix, Hulu, and others to bundle content with telecom services. Finally, while we agree that AT&T can improve the advertising business, using data to better target consumers, we believe the changing nature of television viewing limits the size of this opportunity.While we don’t see clear benefits in the combination, AT&T’s most important segments (wireless and media) are still solid businesses on their own. The firm’s scale in wireless still gives it an advantage over smaller rivals Sprint and T-Mobile, enabling it to generate far stronger profitability while charging similar prices. While the proposed merger of those two smaller firms would narrow this scale advantage, it would also greatly improve the industry’s structure, leaving three players with little incentive to price irrationally in search of short-term market share gains.WarnerMedia remains a media powerhouse with a deep content library and the ability to reach audiences across a wide variety of platforms. This position should enable its studios and networks to remain a destination of choice for the best content creators well into the future.Still, AT&T management’s capital-allocation record is weak, in our view. We believe recent decisions to acquire DirecTV, bid aggressively for wireless spectrum, and enter Mexico have destroyed shareholder value. AT&T has now largely placed its bets, which we expect will limit strategic flexibility and shareholder returns while it digests WarnerMedia and returns debt leverage to normal levels, a process likely to take three or more years.