Nobody's talking about the dividend!
Monday morning, in what many in the media are calling a transformational deal, AT&T (T) is spinning off its Time Warner media assets with Discovery (DISCA) to create an entertainment colossus, while getting $43 billion, while its shareholders will get 71% of the new company. Commentary about this merger dominated the day's trading. It was almost all positive, a terrific outcome for all.
I am not calling it a transformational deal. I am calling it the denouement of a ridiculously stupid deal, the $85 billion acquisition of Time Warner, a deal that closed less than three years ago.
To me it is impossible to talk about this deal with a straight face. If you go over all of the reasons they did this deal in the first place, it's about all sorts of gobbledegook about how AT&T's strengths in direct and consumer distribution merging with the creative talent of Time Warner. As then AT&T CEO Randall Stephenson said, "We're going to bring a fresh approach to how the media and entertainment industry works for consumers, content creators and advertisers."
Over and over in every venue, Stephenson talked about the direct relationship and how most most media companies don't have that direct relationship.
This move is a major repudiation of every bit of that illogical idea. Was it all chimerical, all of this talk of hundreds of millions in synergy and monetizing that close relationship AT&T has with its customers by giving them entertainment?
I think so.
I have heard of new CEOs from outside, dismantling some of an operation when he or she gets in. But to separate the entire operation, as if all of this talk of the "direct relationship" meant nothing, from the former head of the division, John Stankey, who now runs the place. There must have been nothing special at all, except a huge amount of debt taken on to buy the thing, debt they couldn't afford if they were going to keep the dividend.
If you read the fine print, you will find that the dividend has been cut in half. Oh, they don't say that. They say in the release, "After close and subject to AT&T Board approval AT&T expects an annual dividend payout ratio of 40% on anticipated free cash flow of $20 billion plus." For the uninitiated --which includes many of the shareholders -- that's a 50% reduction in why they own it in the first place.
Transformational? How about disgraceful all the way around?
To me, and, hopefully to the board of directors, this was a tremendous destruction of value and shareholders' money. Was there really nothing to all of this direct relationship to the customer? I heard a lot of talk Monday about how the landscape of entertainment changes so fast that AT&T realized it had to do something to keep up and this was it. Given the rationale, though, there would have been no reason to sell it. The "direct relationship" concept just seemed to not have mattered at all. It was all completely wrong or totally stupid or both. But in corporate America, no one is allowed to say it.
No one can say "my predecessor made one heck of a moronic move paying $85 billion a couple of years ago, claiming that our direct relationship would matter, because we are just a heavily indebted cellphone company with no important relationship with the consumer at all. But because he paid so much for no reason whatsoever, I have to dump it for about half of that and cut the dividend in half, even as I know you bought AT&T as a way to get good income."
Wouldn't that be better than all the other things you might have heard Monday?
Now, let's talk about what this really means for you, the shareholder, because there are important takeaways from what happened here.
First, in corporate America anything goes. No one is going to stick up for the existing shareholders who got suckered into owning this one, believing the synergy was producing a great dividend and that the actual dividend itself was safe. No one apologizes over the waste. No one disparages the person who put this whole deal together, or even mentions the now dubious rationale. Everyone gets away with anything. No one apologizes for being a knucklehead.
Then, you have to wonder what really went wrong here. You could say it's the bogus concept. I think that's only a part of it. The other part is that this is what happens when you run the most heavily indebted company in America. I could tolerate this blundering by an Apple (AAPL) or an Alphabet (GOOGL) or Facebook (FB) -- not that they would ever be so dumb as to make this kind of acquisition. But a company with billions upon billions of debt already, including $48.5 billion from another ill-fated acquisition, the now spun out Direct TV seven years ago, this was just complexly ill-advised, and boy, oh boy, am I being polite to say this.
Next it's great way to learn why you never reach for yield, because most of the time the company can't afford to pay a dividend that gives you a 6.7% yield. I say "great," because if you bought it within the last few months, you didn't get hurt learning.
Finally, unlike, say sports, there's no referees in this one. Nobody to say, "nope you can't do this, it's against the rules." Maybe the board of directors is supposed to fulfill that role, but I don't think this board played that role. I don't think anyone played that role.
It's fortunate that so many American companies have very little debt and are far less desperate than AT&T when it comes to direction or discipline or lack thereof. There are three companies making big acquisitions or trying to make acquisitions right now and all three to me make a ton of sense. There's Salesforce (CRM) trying to buy Slack (WORK) for $27 billion, Nvidia (NVDA) trying to buy Arm Holdings for $40 billion and Advanced Micro Devices (AMD) closing in on Xilinx (XLNX) for $35 billion. Salesforce.com needs Slack as a way to compete with Microsoft (MSFT) . Slack's a terrific product and CEO Marc Benioff is a tremendous buyer, who has proven his doubters wrong again and again. Nvidia wants to own the device business and Arm Holdings has the best software platform. The combination would be so unbeatable that it might not be allowed. AMD needs Xilinx to diversify away from personal computers, and high performance computing and Xilinx chips are in very different markets including cars and aerospace and health care.
These are the kinds of deals where the rationale is so clear that it's not even arguable. There is nothing alchemy here. They are the kinds of deals where the CEOs have also earned the right to take these actions because they are founders are saviors.
In other words, the AT&T buy of Time Warner for $85 billion should never have occurred. There's only one winner in this, Jeff Bewkes, the man who pants'd AT&T by selling it to AT&T for a fortune for his shareholders. He's the one who should be celebrated. I always joke with my friend David Faber that Jeff Bewkes is a great American, because he's been so fabulous for his investors. Looks like he earned his esteemed appellation still one more time.
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