There have been a lot of articles, posts, and emotional reactions about AT&T’s spin-off & merger of their Warner Brothers assets with Discovery as well as their proposed dividend cut. On the negative side, many felt the dividend cut was a betrayal while others accused leadership of yet another failed merger resurrecting DirectTV pains and comparisons. On the positive to neutral side, people scrambled to evaluate the value of the old and new companies (post spin-off) while the spin doctors were saying this will benefit all involved and offer growth opportunities to both companies.
When the news first dropped, I was initially surprised as I thought they were turning a corner with their HBOMAX subscriptions (after an initial embarrassing rollout). They got the Roku drama behind them, did a great job bundling HBOMAX with the mobile business, and did a successful hybrid movie rollout between streaming and theaters. For the first time in a long time, I thought AT&T finally had a path to growing the company. They finally have a growth machine and they are getting rid of it? Combine that with the dividend cut and my initial reaction was sell but I also knew this was an emotional reaction and decided to step back and take time to better understand what is happening.
After having a week to digest the news I no longer have the urge to rush out and sell. I still have questions on what the financials will be and undecided if I want to sell or hold but for now at least I feel I have some clarity as to why. The popular explanation as to why is to reduce debt on their balance sheet and focus on their 5G assets while those on the negative side believe they overpaid for an asset they did not know how to manage or integrate and trying to get out of yet another bad deal. I do not agree with either statement and offer an alternative explanation.
When the streaming wars first started most planned budgets, outside of Netflix, were from $1b to $2b range but that has quickly escalated. This is no longer a “War”, this competition is escalating into a full all out Nuclear War with no end in sight. Amazon grew their streaming content budget from $7b in 2019 to $11b in 2020, Disney spent $7b in 2020 and is predicting they will be spending $14b-$16b by 2024, Apple initially planned a $1b budget but had to run that up to $5b in their first year and now spends $11b annually, and finally we have Netflix who budgeted $17b for 2021 and will grow that to $19b in 2022. The amount of money required to generate new content is increasing dramatically year to year and I have not even mentioned Viacom/Paramount or Peacock streaming.
We are witnessing an arms race in the media sector, and it is something that has the potential to distort AT&T’s core telcom business while limiting their media business. Rolling out 5G is not a low-cost endeavor and combine that with the media arms race there were bound to be conflicts as to how much budget can be allocated to either. By separating the two assets each can pursue and focus on their own investment/growth strategy and it is this perspective the spin-off makes sense to me.
As far as the negative view that AT&T made another bad investment decision I disagree. No one foresaw a pandemic that would accelerate the streaming war to not just investment in content but also accelerated media company mergers. Unlike the DirectTV deal the media market is far from being a declining or obsolete business. Additionally, previous AT&T management would have held the assets years longer and incurred even more debt before admitting defeat and must sell or spin-off when it is too late so I see this as a proactive decision.
For now I see no risk holding T while collecting dividends until the deal becomes more defined and a better decision can be made. Until that time I have no plans to add additional shares and stopped using the DRIP.
