AT&T Chief Executive Officer John Stankey Updates Shareholders
AT&T Chief Executive Officer John Stankey Updates Shareholders
Underlying Business Momentum Supports Strategic Focus
Stankey said that he and AT&T’s board of directors considered a variety of opportunities for the company, and that the strategic separation of its media and communications operations reflects their confidence in the underlying market momentum in both businesses.
In AT&T Communications, over the last three quarters the company has posted the best wireless postpaid net adds in more than a decade. And the company recorded its best ever fiber gross adds in the first quarter of 2021, with about 70% of those new to AT&T. On a net basis, fiber subscribers were up more than 1 million, or 25%, versus the first quarter of 2020, with penetration more than 35% across the company’s fiber base as of the first quarter of 2021.
WarnerMedia delivered strong results in the first quarter of 2021, as well, with domestic HBO Max and HBO subscribers1 up 11.1 million since the launch of HBO Max in the second quarter of 2020, reaching more than 44 million. This strong momentum comes ahead of the recently announced ad-supported subscription tier of HBO Max priced at $9.99 per month, which will launch in the United States the first week of June. HBO Max will begin expanding internationally in June targeting 60 countries in Latin America and Europe in 2021. WarnerMedia also continues to invest in content and ramp up production as pandemic-related restrictions abate giving all of its distribution channels, including HBO Max, a robust lineup of content to continue to engage and delight viewers.
WarnerMedia-Discovery Deal Improves Financial Flexibility
Stankey said that the WarnerMedia-Discovery transaction will significantly improve AT&T’s financial flexibility by providing $43 billion (subject to adjustment) for debt reduction through a combination of cash, debt securities and WarnerMedia’s retention of certain debt. This debt reduction allows the company to progress toward the end-of-year 2023 leverage ratio target of less than 2.5x2 while increasing investment in growth areas of 5G and fiber.
Post close, Stankey said he believes that having a clear ownership separation between AT&T and WarnerMedia gives AT&T the opportunity to align its investor base in the communications business with a focused total return capital allocation strategy. He said he expects that increased investment in 5G and fiber will support longer-term growth and healthy returns for shareholders.
A Unique Opportunity to Support Improved Market Positioning
The combination of WarnerMedia with Discovery and subsequent opportunity to materially increase investment in AT&T’s core communications business provides a unique opportunity to improve both businesses’ market positioning.
AT&T shareholders will own 71% of the shares in the new media company. It will have not only global direct-to-consumer (DTC) distribution capabilities but also a robust content library and the ability to create compelling new content, both of which are imperative to successfully compete in DTC on a global basis. Combining WarnerMedia with Discovery also will give the new company an opportunity to drive efficiencies that can be reinvested into content and digital innovation and used to scale the global DTC business. Ultimately, Stankey noted that in addition to these synergies value is also expected to be created for shareholders both by unlocking WarnerMedia from AT&T as a parent company and by accelerating the new company’s ability to scale.
AT&T is confident the new company can deliver on the expected cost synergies of $3 billion per year given Discovery’s proven track record, including delivering synergies from its Scripps acquisition that were more than two times original projections. For the combination with WarnerMedia, the companies expect significant synergies from technology, marketing and platform savings with consolidation of DTC capabilities. Additional synergies are expected from corporate overhead and SG&A savings, particularly for domestic networks as well as opportunities to reduce duplicate initiatives designed to support growth in each of the standalone entities.
Stankey also reiterated that Discovery is the right company to combine with WarnerMedia given the complementary assets. Confidence in the combination is reflected by the fact that holders of approximately 44% of Discovery stock have already indicated they will vote in favor of the transaction.
In AT&T’s remaining communications-focused business, the company is at the crossroads of two technology transitions — 5G and fiber. Following close of the WarnerMedia Discovery transaction, AT&T will have the financial flexibility to boost investment to historically high levels that are also significantly above its competitors’ planned investments.
AT&T’s expected capital expenditures of around $24 billion per year from 2022 to 2024 builds on its existing position as one of the largest investors in digital infrastructure and connectivity in the United States. This investment will allow AT&T to meet substantial, long-term demand for connectivity by delivering broadband access to millions more households with plans to expand the company’s fiber footprint to cover 30 million customer locations by year-end 2025, and expectations for its 5G C-band network to cover 200 million people in the U.S. by year-end 2023. AT&T also believes it will be able to better compete against companies offering alternate technology solutions, some of which lack the proven ability to meet customers’ growing connectivity needs.
Total Return Strategy Focused on Creating Attractive Shareholder Returns
Stankey noted that the company’s total return capital allocation strategy is focused on driving long-term shareholder returns. Management’s goal is to provide both WarnerMedia and AT&T Communications the ability to invest the capital needed by both businesses and access to capital to do so.
He said that AT&T’s expected robust free cash flows of $20 billion plus2 per year post closing gives him and the board confidence in AT&T’s ability to pay the dividend and invest at elevated levels. This free cash flow guidance reflects confidence in the company’s ability to generate EBITDA growth via continued success in mobility and improvements in the consumer wireline business from increased fiber investments and steady management of the company’s business wireline operations. Additional support will come from plans to realize incremental transformation cost savings of $1.75 billion to $2 billion by 2023 — with some of the savings expected to be reinvested to support growth initiatives; expected annual cash distributions from DIRECTV of about $1 billion; and lower cash interest costs after using the approximately $50 billion in proceeds from the pending WarnerMedia and DIRECTV transactions to de-lever the balance sheet.
Attractive Dividend. AT&T does not expect changes to the dividend prior to the close of the WarnerMedia-Discovery transaction, which is expected to occur in mid-2022. Stankey reiterated that after close and subject to AT&T Board approval, AT&T is expected to continue to be among the top 5% of dividend paying stocks with an anticipated annual dividend level of $8 billion to $9 billion per year. Also at close, existing shareholders of AT&T will continue to hold their shares in AT&T but will also hold 71% of shares of the new media company. The expected value of those shares based on the capitalization as of May 14, 2021, is in the $7-$8 range per share of AT&T stock, or the equivalent of 4+ years of AT&T’s current annual dividend, tax free.
Stockholders will have optionality to maintain their stake in the new media company and benefit from any appreciation, or, for those who prefer dividend income, they may sell their shares of the new media company and reinvest in dividend stocks, including AT&T.
Looking Ahead. Following close of the WarnerMedia transaction and on a pro forma basis, AT&T expects:
- Annual revenue growth: low single digits CAGR
- Annual adjusted EBITDA and adjusted EPS growth: mid-single digit CAGR
- Significant debt reduction with Net Debt to Adjusted EBITDA2 in the 2.6x range after close, moving to less than 2.5x by year end 2023
- Attractive dividend, subject to AT&T Board approval, with an annual dividend payout ratio3 of 40% to 43% on anticipated free cash flow of $20 billion plus
- Optionality to repurchase shares once Net Debt to Adjusted EBITDA is less than 2.5x
Stankey reiterated that the company will remain diligent in examining its asset portfolio, stepping up investment levels to support growth where needed, to refine and optimize the returns and fuel further investment, and to monetize assets where there are opportunities to drive additional shareholder value.
The WarnerMedia-Discovery transaction is anticipated to close in mid-2022, subject to approval by Discovery shareholders and customary closing conditions, including receipt of regulatory approvals.
1 Domestic HBO Max and HBO subscribers consist of accounts with access to HBO Max (including wholesale subscribers that may not have signed in) and HBO accounts, and exclude free trials and Cinemax subscribers.
2 Net Debt to Adjusted EBITDA ratios are non-GAAP financial measures that are frequently used by investors and credit rating agencies to provide relevant and useful information. AT&T’s Net Debt to Adjusted EBITDA ratio is calculated by dividing the Net Debt by the sum of the most recent four quarters Adjusted EBITDA. Adjusted EBITDA estimates depend on future levels of revenues and expenses which are not reasonably estimable at this time. Accordingly, we cannot provide a reconciliation between Adjusted EBITDA and the most comparable GAAP metric without unreasonable effort.
3 Dividend payout ratio is total dividends paid divided by free cash flow. Free cash flow is a non-GAAP financial measure that is frequently used by investors and credit rating agencies to provide relevant and useful information. Free cash flow is cash from operating activities minus capital expenditures. Due to high variability and difficulty in predicting items that impact cash from operating activities and capital expenditures, the company is not able to provide a reconciliation between projected free cash flow and the most comparable GAAP metric without unreasonable effort.