Wednesday 21 November 2018

Investors fear AT&T rescue could be a job for Superman

AT&T under pressure

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Click to enlarge

John Lynch

The great Italian film director Luchino Visconti had Burt Lancaster star in a brilliant movie many years ago called 'The Leopard'. It was set in Sicily during Garibaldi's rising that inevitably led to a united Italy.

The film had all sorts of insights into revolutionary change. The most impressive came when one of the aristocrats in the drama, who, although his position in Sicilian society was threatened, opted to back the rebels, declaring: "If we want things to stay as they are, things will have to change." For some reason, this little bit of political wisdom came to mind when I was researching this week's company, the giant telecommunications company AT&T.

Those of us stricken with a long memory will recall that for decades and decades AT&T was the monopoly in the United States.

But in a flurry of righteousness in the 1980s, it was forced by the American courts to fragment itself.

The company, which carried the name of inventor Alexander Graham Bell, was divested all over the place.

Was this the best thing to do? Two decades after the court decision, one of the original Bell subsidiaries, SBC, successfully purchased its former parent, retaining the name AT&T.

Over time, the vast majority of the so-called Baby Bells melted back to form the 'New AT&T'. Clearly things had to change so that they could remain the same.

Today, AT&T has a market value of $245bn (€208bn). It is the largest global telecom company in the world with more than a quarter of a million employees.

The group provides pay-TV to 45 million customers, and has more than 130 million mobile customers. It is also the largest fixed line provider in the US, and since last May, following its takeover of Time Warner, is now the world's largest media and entertainment company.

The Time Warner $85bn purchase handed AT&T salvation, along with the biggest names in the media sector, including CNN, Turner Broadcasting, Warner Bros, theme parks and franchises like Superman and Batman.

The deal was an attractive acquisition for AT&T, giving it more revenue diversity to supplement the position it secured three years ago when it paid $48bn for satellite TV provider, Direct TV.

In one of those extraordinary ironies, the same US legal system that forced divestment in the 1980s came to AT&T's rescue in its bid for Time Warner. The courts rejected the US Justice Department's opposition after a torturous two years.

Politics also has a shout in this case. Since originally announced in 2016, the proposal faced a threat from the then-candidate Donald Trump, who pledged to stop it going ahead. After his election, the Justice Department sued to block the deal. One of AT&T's defences was the Justice Department objection was politically motivated. Surprisingly it has emerged the company had paid Michael Cohen, Trump's ex-personal lawyer, for advice on the deal last year.

An examination of the group over the last five years shows an impressive performance. Revenues were up 26pc to $160bn, net income jumped by more than two-thirds to $30bn and its price earnings multiple is a modest 12.

However, last year the group hit the buffers and began to show the need to diversify away from its large, existing, maturing business. With the exception of its small ($12bn) international business, all other parts of the business are going backwards.

Business solutions, its largest division, saw revenues fall more than 2pc in spite of margin increases, and its entertainment segment, with revenues of $51bn, was down a similar amount.

The consumer business revenues fell as did its operating income and margin. Overall, investors were not impressed.

This is reflected in the group's share price which trades at $33, just above its lowest in the last five years. Investors hope the Time Warner acquisition is not only timely but profitable and that the rise and rise of Amazon and Netflix is arrested.

Otherwise, all the effort and debt incurred will look horribly risky.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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