Prologue
In any sector, the company that has a control over its whole vertical – from the underlying infrastructure to the products delivered through – tends to provide the best results both for the customer as well as the business itself. For the business, it leads to better management, reduced costs, better integration etc. which, for the customer, translates to an overall better experience.
Take the case of Amazon for instance. Over the past few years, Amazon has been investing heavily on its infrastructure, from fulfillment centers and warehouses to logistics division. In the past year, it invested 80% more compared to year before. The reason? Vertical Synergy.
In this story we’ll look into a case in which such an attempt led to a bitter end.
Introduction
This story revolves around the US telecom giant AT&T. At around 2014, the telecom market was going through a phase characterized by stagnation. 4G was well into its third year and 5G was not in the near horizon. At the same time, media content and entertainment companies were growing like anything.
Companies like Netflix were widely appreciated by everyone. While actually network companies like AT&T, Verizon etc. provided the underlying infrastructure for people to access the internet in order to watch Netflix, they were pushed to the side as mere utilities, and were taken as granted.
AT&T, the second largest telecom provider in the US at that time, wanted a piece of media. It started with DirecTV.
AT&T Splurging on Media
AT&T’s shopping spree involved 2 major deals: –
DirecTV
In 2015, AT&T paid $49 Billion for DirecTv, the satellite TV service provider. The rationale behind this being that they could now bundle their broadband and landlines together with a cable connection. It wasn’t media as such but AT&T bought added it to its cart. What the heck! The deal was costly for AT&T whose debt now rose to $126 Billion from $86 Billion before the deal.
Becomes World’s Largest Pay TV Provider and Video Distribution Leader Across TV, Mobile & Broadband
AT&T blog(July 2015)
Timewarner Inc(WarnerMedia)
Just the next year, in 2016, AT&T offered to buy TimeWarner. This time they were looking to expand on their media content library mainly with Warner Bros. Pictures and HBO among other Timewarner assets like CNN. It would give them a huge library of movies and shows which they could then leverage on the streaming space.
But this deal took about 20 months to close due to an antitrust lawsuit initiated by the then President Donald Trump. The court finally ruled in AT&T’s favor in 2018. The deal was closed for about $102 Billion including TimeWarner’s debt. By then, AT&T was in about $177 Billion in debt, becoming the largest debt holder other than banks.
This would seem like the perfect case of a well executed and integrated vertical synergy. But it did not go like that. It all came crumbling down.
The Undeals
Six years into the media game, AT&T began selling stakes in its media businesses.
Un-deal #I – DirecTV
In March 2021, AT&T announced that it would spinoff DirecTV into a separate entity called “New DIRECTV”. For this, AT&T sold a stake in DirecTV to the private equity firm TPG for about $16 Billion. The rationale behind this was to streamline its focus more on wireless networks, media and content.
This agreement aligns with our investment and operational focus on connectivity and content, and the strategic businesses that are key to growing our customer relationships across 5G wireless, fiber and HBO Max. And it supports our deliberate capital allocation commitment to invest in growth areas, sustain the dividend at current levels, focus on debt reduction and restructure or monetize non-core assets,
As the pay-TV industry continues to evolve, forming a new entity with TPG to operate the U.S. video business separately provides the flexibility and dedicated management focus needed to continue meeting the needs of a high-quality customer base and managing the business for profitability.
AT&T CEO John Stankey
The Undeal of the Decade – WarnerMedia
Though it is still the barely the beginning of this decade, this un-deal is significant.
Since 2019, investors have raised concerns about Warnermedia and its future goals as apart of AT&T.
In May 2021, AT&T announced that it would merge its media assets under WarnerMedia Inc with that of Discovery Inc’s and spinoff into a separate entity. This seems to be a downer considering the fact that in 2019, AT&T CFO had said HBO Max, its streaming service, was to be “the key aspect of [AT&T’s] video strategy going forward.”
After this deal, AT&T will walk of with $43 billion in a combination of cash, debt securities and WarnerMedia’s retention of certain debt. AT&T shareholders will retain a 71% in the combined entity with Discovery holding 29%. The new entity will be headed by Discovery CEO David Zaslav.
In absolute terms, for AT&T, these 2 media deal and un-deal fiasco ended up in a loss of $92 billion(just in terms of the amount paid and sold for)! i.e :
($49B + $102B) – ($16B + $43B) = ($92B) (loss)
The New Entity – Some Stats and Facts
- The combined entity will have assets like HBO, HBO Max, CNN, Warner Bros. Pictures, Discovery+, TLC, Eurosports etc.
- Currently HBO Max has roughly 20 million subscribers and Discovery+ has about 15 million subscribers.
- The combined entity will spend $20 billion in content for this year, compared to $17 billion that Netflix has as its budget for the year.
WarnerMedia – A Timeline
- In 1990, Warner Media merged with Time Inc to form TimeWarner Inc.
- In 2001, TimeWarner sold itself to AOL for $164 Billion in the hopes that AOL will help TimeWarner propel through the digital age.
- By 2009, both the companies split up to become independent entities.
- In 2015, Verizon bought AOL for $4.4 billion and later sold it to Apollo Global Management together with Yahoo, which it had bought in 2017 for $4.5 billion for $5 billion(half of what was paid for both).
- In 2016, AT&T offered to buy TimeWarner, the deal closed in 2018.
- In 2021, just after 3 years, WarnerMedia was spun off and merged with Discovery.
Closing Comments
The thought of vertical integration is indeed a good one, but that must not be at the cost of the core product or service. The time at which they proposed their intention to buy Timewarner was already too late. The lawsuit made it worse.
By the time AT&T could do something with it, there came the pandemic. This forced them to launch their content directly on streaming, ended up costing HBO about $1 billion. Not just that. They had to make huge investments to setup the 5G infrastructure too. This was why their competitor Verizon too dislodged their media assets recently.
Now AT&T is back to where it started – Just a telecom company – but with a huge crater in its balance sheet to the tune of tens of billions. Compared to the time they completed their deal in July 2015, AT&T stock now trades about 11% lower($34 then, $30 now), while the general market increased more than 100%!
In hindsight, it seems, this merger was never meant to be!
