EUR 466.85 For Business Accounts Only

Persistent Weakness and Long-Term Underperformance Indicates Time for Change

Global telecom giant AT&T, Inc. (T) has consistently underperformed both peers and the index over the past two and three years, and the recently closed acquisition of Time Warner, Inc. in June 2018 has saddled the company with a total debt of $183bn (much higher than its peers). What can T do to improve its position in a brutally competitive media industry? We believe improved shareholder returns can be made through a three-way break-up.

What's Interesting? The Edge Ingredients...
Based on total shareholder return (TSR) for the last 1-yr, 2-yr and 3-yr annualized, AT&T has lagged all of its peers and index. We believe that this underperformance has primarily resulted from intense competition, pricing pressure and increasing attractiveness of new alternatives (e.g. OTT streaming), which resulted in weakening fundamentals in both the Entertainment Group (mostly DirecTV) and the Business Wireline segments.

Furthermore, the acquisition of Time Warner, Inc. in June 2018 has stressed the balance sheet of AT&T, with an increase in the total debt levels from $163bn prior to the acquisition to $183bn. This resulted in a rating downgrade by Moody’s, which could result in a higher borrowing cost for the company over the coming years. Currently, AT&T has a leverage ratio (Net debt / Adj. EBITDA) of 3.9x, which is higher than most of its large peers (market cap of >50bn) – Verizon (VZ) 2.3x, T-Mobile (TMUS) 2.8x and Comcast (CMCSA) 2.2x, apart from Charter Communications (CHTR) at 4.7x. We believe that a potential divestment of businesses either through a Spinoff or a sale would help the company to deleverage.

Since the start of 2018 till date, there have been open market purchases worth $9.3m by nine directors and one executive officer of AT&T and one sale transaction of 2,307 shares worth $0.6m. Most of these insiders have increased their holding in the company significantly through an open market transaction and have increased their stake by even >100% and 200%. We notice that majority of the insider purchases occurred in July 2018, with couple of transactions in Aug/Oct 2018 i.e. following the acquisition of Time Warner on June 14. We believe this indicates the confidence of insiders on the benefits from the merger of Time Warner resulting in synergies and better growth prospects for AT&T over the longer term.

The Edge View...
AT&T as a diversified media and telecom company is not able to generate significant strategic benefits, as we believe that these industries do not complement each other. The Business Wireline and Entertainment Group segments are witnessing weakness, which we believe to continue, creating pressure on the top-line and bottom-line of the company. Therefore, we see the possibility of a 3-way break-up; 1) Telecom Businesses (Wireline & Wireless); 2) Entertainment Group & Latin America segments; and 3) Warner Media & Xandr segments. The other possibility is selling off small businesses like the Latin America and Xandr segments and then do a 3-way Spinoff as cited above.