Is it Time to Dump AT&T Stock After Unwinding It's Only Growth Component?

Communications and media giant AT&T, Inc. (NYSE: T) stock is consistently underperformed benchmark indices and peers due to it's addictive acquisition and debt generation habits. In a move that stunned and disappointed markets, the Company decided to offload its WarnerMedia division into a combined entity with Discovery Networks (NASDAQ: DISCA). While the market initially celebrated the move, it punished shares when it discovered that while that a portion of its massive debt-load would be off-loaded into the new entity, the Company would also be slashing its dividend. This bait-and-switch caused investors to ditch shares as déjà vu kicked in. The management reached too far, undermined any progress, and then backtracked. A peek at its prior acquisitions is evidence of the laggard nature of management summed up in four words… late to the party! The Company likely overpaid during the 5G spectrum auctions and still needs to raise more cash to meet the potential 5G demand. Rather than integrating and following through on synergies, they would rather kick the can into standalone entity to bolster its debt rating to… raise more debt. The years of value destruction for overshooting "synergy" scenarios, overpaying for acquisitions (Direct TV $48.5 billion and Time Warner for $85 billion), levering debt, and then backtracking to jump on the next bandwagon is characteristic of this management team. AT&T is no longer a dividend aristocrat, rather has become a cautionary tale of being "late to the party" consistently, overshooting/overpromising, backtracking and sheer lack of accountability that continues to unfold at the expense of shareholder value. Prudent investors can await deep opportunistic pullbacks while current shareholders can use bounces to scale down exposure as this rudderless ship continues to be a cautionary tale of how to wreck shareholder value.

What is the Discovery Deal?

AT&T will spin off its Warnermedia division into a standalone company with Discovery, owning 71% of the new entity while Discovery owns 29% of the entity. Through a Reverse Morris Trust, AT&T will receive $43 billion in a combination of cash, debt securities and WarnerMedia's retention of certain debt. The closing is expected by mid-2022 as AT&T shareholders will receive stock representing 71% of the new Company with Discovery shareholders receiving 29%. AT&T plans to "reset" the dividend by then and have enough free cash flow to fund investments in 5G and fiber, which it sees as the growth driver. Who's actually paying AT&T $43 billion? No one, in fact, AT&T is offloading Time Warner which it purchased for $85 billion at a 50% haircut. Perhaps they could IPO the shares to dump on the public, which doesn't seem like with the 71/29 split of the new entity. It's likely going to mostly share that will be levered as an asset to take on… (drum roll)… more debt. The only way to see cash is to unload the shares to another buyer, either the public through an IPO or private equity, good luck with that!

A New Way to Confuse Consumers

As much as Discovery touts having a viewing library as large as Netflix (NASDAQ: NFLX), the reality is that the content is scripted, and non-scripted "reality" tabloid-like content wrapped around of a bunch of do-it-yourself (Food Network) shows and documentaries that appeal to a completely different audience than HBO Max. Discovery doesn't produce blockbuster live-action movies, they produce shows like 90-Day Fiancé and Real Housewives of wherever which doesn't appeal to theatre-goers anxiously awaiting the next Batman live-action theatre release. There's no cross-marketing synergies as they are completely different audiences. The notion that the Discovery CEO will somehow reinvent the DC Entertainment Universe as successfully as Marvel's Kevin Feige is a pipedream. Mind you, the architect of the MCU plans six years in advance with a complete storyline and character continuity for the rollouts. One thing rings true during the streaming wars, content is king. AT&T just unloaded one of the world's most valuable intellectual property (IP). That is the DC Universe of superheroes that generations have grown to adore and follow like Superman, Batman and Wonder Woman. Yet, AT&T simply doesn't care… they would rather overpay for more 5G spectrum and build out which they won't see returns for at least a decade. The future of the DCEU is questionable as rumors about regarding the potential to sell-off the property to Marvel Studios (NYSE: DIS), which would be great of Disney shares. The sad part is that the markets were finally pricing in the valuable IP as shares were finally breaking out again before management announced this unbelievable act of ineptitude as Mad Money's Jim Cramer (rightfully) placed AT&T CEO John Stankey and former CEO Randal Stevenson on the Wall of Shame.