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AT&T Is Getting Closer to a Clean Slate. Here’s What Comes Next.

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After a saga of misguided M&A, there’s still work to be done for AT&T.
Patrick T. Fallon/AFP via Getty Images

AT&T shed some light on its pending exit from the media business on T uesday, elaborating on the mechanics of this year’s mega-transaction to spin off WarnerMedia and merge it with Discovery . It’s one more step toward putting a saga of misguided M&A behind it, but there’s still work to be done.

AT&T (ticker: T) spent much of the past decade bulking up and dishing out billions of dollars on several acquisitions. The biggest were a $66 billion deal for DirecTV, which closed in July 2015, and the $106 billion acquisition of Time Warner, which closed in June 2018. That brought the 145-year-old phone business into new and more cyclical industries, and at one point made it the most-indebted company in the U.S.

Since the start of 2021 and under a new CEO, John Stankey, AT&T has been slimming down. A spinoff of DirecTV and the company’s other pay-TV operations was announced and completed last year. Its Xandr advertising platform is being sold to Microsoft ( MSFT ). And the spinoff of WarnerMedia should close in the second quarter of this year, per management.

It will leave AT&T with a telecom-only portfolio of businesses focused on 5G wireless and fiber-optic broadband. Those are high fixed-cost businesses, but also bring attractive economies of scale and recurring revenue from subscribers.

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Shedding its conglomerate structure won’t make the challenges AT&T faces in its telecom businesses go away, but it will allow management to focus time and resources on solving them. Competitive dynamics in both wired and wireless communications appear to be getting more intense, especially as industry subscriber growth slows following a pandemic-era boost. And AT&T requires tens of billions of dollars in capital expenditures to improve its 5G and fiber networks.

AT&T plans to expand its 5G C-band network to 200 million people in the U.S. by the end of 2023, and wants to reach 30 million homes and businesses with its fiber network by the end of 2025.

AT&T will have more financial firepower to throw at those goals. Management expects $20 billion of annual free cash flow from the post-WarnerMedia telecom company, with 40% of that, or $8 billion, going toward its dividend. That compares with a $15 billion annual dividend commitment prior to the spinoff. The new payout will be some $1.11 per share annually, or a 6.3% yield at current prices (adjusting for the roughly $6.70 a share in Warner Bros. Discovery stock that AT&T holders will receive). It matches the projections that AT&T gave when announcing the transaction in May 2021.

AT&T management expects to spend around $24 billion on capital investments in 2022. And the company will get an estimated $43 billion via the WarnerMedia transaction to put toward paying down debt. Management expects to get net debt to adjusted earnings before interest, taxes, depreciation, and amortization–or Ebitda–down to 2.5 times by the end of 2023. That compares with about 3.2 times today.

The result should be a leaner, meaner AT&T that’s better equipped to face its challenges, but investors will want to see proof after feeling burned by years of management decisions that look poor in hindsight. Next up is a virtual investor day on March 11 focused on the post-WarnerMedia telecom business, which could include new long-term targets and plans.

The closing of the transaction itself should also bring some relief. Investors interested in Warner Bros. Discovery can shift to that stock, and those who want a yield-generating telecom stock can double down on AT&T. Most of all, it will allow Wall Street to focus on AT&T’s fundamentals and judge management on operations–and put an end to years of distracting and expensive M&A sagas.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com

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