May 13, 2021 - 10:44am EST by
2021 2022
Price: 32.00 EPS 0 0
Shares Out. (in M): 7,140 P/E 0 0
Market Cap (in $M): 228,000 P/FCF 0 0
Net Debt (in $M): 170,000 EBIT 0 0
TEV (in $M): 398,000 TEV/EBIT 0 0

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AT&T is a long based on a SOTP analysis plus changes in management

1) Warner Media is currently 18% of profit and 25% of the valuation. In 5 years I think it will be 35% of profit and 55% of the valuation. As outlined in a writeup I did on Disney in late 2019, the economics of going direct with content is extremely accretive to content owners if they have scale. I will elaborate more below. I believe Warner, with AT&Ts backing, has the best chance at being a global player following NFLX and DIS. They have much better scale, management and content than VIAC, DISCA and NBCUniversal.

2) While TMUS will become the leader in wireless, competition will be lighter than in the past. DISH will be a niche player with several obstacles to becoming a strong 4th player. Street forecasts for wireless imply that ROIC will drop from 9.5% to 7% whereas I think it should at least hold steady if not rise. In Canada, where there are 3 strong players with a couple of strong regional 4th players, ROIC is 13-16%.

3) AT&T’s management did a bad job over 10 years. Spending $65bn on DTV was dumb. They just sold a stake in it at a $16bn valuation. I like their Warner acquisition because of my view on the economics of streaming video, but they handled it very poorly early on. Elliot Management got involved and made several accurate criticisms. Since then, the situation has improved. They hired Jason Kilar to run Warner Media, he ran Hulu early on and if DIS/FOX/NBC listened to him, Hulu could have become as big as NFLX today. He is the right man for the job and they are giving him full control. On the telecom side of the business, management is starting to divest assets and regain focus.

Warner Media Segment

I will briefly summarize the economics that I laid out in my 2019 Disney writeup. For details you can read that writeup.

Streaming video is cheaper and better than Pay TV. You can replicate the content you want at a 30% discount. Plus the consumer is in control of what he/she watches. Over time, live sports be offered via streaming and there will be no reason to remain a Pay TV subscriber.

In a D2C relationship, the content companies can now raise their ARPU significantly as they no longer have to split revenues with the cable operator. This allows them to invest more in content and create more value for the consume who will then pay more for video streaming.

The interesting economics are on movies. Right now a person spends $5 on food when they go to the theater and $10 on a ticker. $5 of that ticket goes to the content company. Now that you go direct, there are many ways to segment and re-price the market.  On average, people spend $60 a year to see 4 movies. Now you can ask them to spend $60+ for the right to watch all the movies they want at home. And the content company retains all the incremental economics.

The problem with D2C is you need scale. I estimate $5bn in incremental opex to go global. Not many companies can afford to do that and few have content that is strong enough anyway.

Warner Media has solid content. I ran a detailed consumer survey and there is strong affinity for HBO both in the US and abroad. There is also fairly strong affinity for their top movie franchises (Harry Potter, Hobbit, Matrix, DC Comics, etc) and kids content (Scooby Doo and Looney Toons). Warner Studios has about 15% share of the global box office. They brought in new people to refresh their kids content, a solid team. They also have 5 of the top 10 sitcoms available on HBO plus. Eventually TBS and TNT will move their sports rights to the streaming platform. They offer many NBA and MLB games. Overall, there is something for everyone.

So why did HBO MAX get off to a slow start? 1) They had to price at $15 because of their contracts with Pay TV operators. They could not undercut the Pay TV price. 2) The old management executed very poorly across the board: brand confusion (MAX v GO etc), no agreement with ROKU and AMZN FireTV, many pieces of content were not available on day 1 (and unfortunately some still aren’t), the user interface and technology was glitchy and upset many users.

Jason Kilar is addressing all these flaws as best he can. 1) $10 ad supported subscription. My survey showed high interest in an ad supported model. Ideally I would prefer a $9 price point but they will test and see what is optimal. They will not degrade the quality of the experience, no ads during movies or HBO shows. 2) Kilar brought much of his old Hulu staff with him. They will get the branding right and the tech right. So far, both have improved and they will only get better. My survey indicates that many people do not understand what is on HBO MAX. they significantly underestimate the amount and quality of sitcoms and non HBO Content and they underappreciate what is in the Warner Bros catalogue. 3) they are now spending $2bn more on content. And attempting to go global as fast as possible.

I think very highly of Jason Kilar. He was trained by Jeff Bezos and he has had an obsession with Walt Disney, the man  and the company, since he was 10. He is very innovative, he is obsessed with the customer and he respects the content creators – he will not override them.

I think Warner Media EBIT and FCF will double over time. In my worst scenarios, EBIT and FCF still grow.

AT&T Wireless segments

I think it’s appropriate to analyze the wireless segment on an ROIC basis, including spectrum holdings in capital.  In 2008, Canada gave new entrants preferential terms to buy spectrum with the goal of increasing competition in a 3 player market. Since that time, Quebecor became a strong player in Quebec and Shaw out west (mostly through acquisition). Nonetheless, ROIC have not changed much. The economics of the industry tends towards oligopoly. It is hard to create a strong 4th player. Plus in Canada, like the US today, all companies have low end fighter brands that are used to fight a low price position of any new entrant.



Aside from VZ, US ROICs are simply not good. And if you model out street forecasts, they decline even further with the exception of the newly merged TMUS. Here is why I think ROICs should not decline. 1) effectively the competitive environment is replacing a fierce rivalry between S and TMUS with DISH. I believe DISH does not have the assets to be a strong 4th player. Their network will do well in certain segments of the market: some enterprise solutions and some geographic locations. Their 70 Band spectrum is problematic as there is no ecosystem for it. As a result, it will take time to build out their network and they rely on 2nd rate vendors. This band of spectrum does not propagate as well as 2.5Ghz midband spectrum which limits them in rural areas. Given their spectrum and Charlie Ergen’s propensity to save money, they will likely meet regulatory requirement for covered POPs by focusing on urban cities. This will hurt VZ more than AT&T. the point is that DISH cannot compete everywhere. Dish is stuck with very poorly located retail stores (Boost branded). That makes it hard to do well in the postpaid market. DISH should do reasonably well in enterprise, however there will be skepticism given they are a new entrant. To mitigate that, the bulk of growth in 5G will come from enterprise. 5G allows carriers to effectively offer enterprises the opportunity to setup a dedicated custom network. This will allow them to capture more value with each customer. Plus with increased speeds many new use cases open up. There should be plenty of business for all 4 carriers.


TMUS will have the best network and will clearly take market share. AT&T is worst positioned of the big 3, they could use some more midband spectrum. However, they are not in a bad position. A sensible strategy is to remain a close 3rd to VZ and sacrifice some market share which then allows them to spread their midband spectrum over fewer subs and offer a high quality network. In my forecasts I have them losing 4% market share over the next 4 years. If I assume their ROIC declines slightly to 9.0% from 9.5%, then their revenue and EBITDA still grow. The key to the thesis is that the industry structure improves.


AT&T Video, broadband and wireline businesses

Most of these segments are in straight up decline. However, I like their strategy of Fiber to the Home (FTTH). FTTH is superior to cable. It offers faster speeds, greater reliability and is future proof. I calculate that ROIC on capital deployed into FTTH is between 10% and 15%. Right now 15M HH have FTTH out of an approximate 55M HH footprint. They are passing 3M HH in 2021 and 4M in 2022. I believe they will reach ~35M HH in 5-7 years. At that time, I think the wireline segment will stabilize or grow because the majority of revenue will come from FTTH.


Valuation and target price

I think over time FCFE can grow to $38.5bn. Wireless ROIC will hold up as they monetize their recent spectrum purchase and continue to build their network. Warner Media FCF will double. If I value Wrieless at 11x and Warner at 18x with the rest at ~7x I get a target market cap of $470bn on a 13.5x FCF multiple. That is a $65 share price in 4 years, plus there is a 7% dividend yield.



1)      AT&T Management continues to screw up – I think they have learned and accept that they have made mistakes. M&A is over. However, some of the poor decision makers still remain. That said, I view the hiring of Jason Kilar as a huge positive sign. Kilar has a reputation for refusing to deviate from his vision. AT&T would not hire him if they wanted to meddle with Warner Media

2)      The management shakeup at Warner Media has a negative effect – Jason Kilar is controversial. He decided to put all of 2021’s movies on HBO MAX the same day they are released in theaters. This pissed off some creatives with director Christopher Nolan berating the company. I researched this incident and concluded that Warner was going about the decision the right way, negotiating with all the talent but there was a leak and they had to do damage control and announce a decision prior to people like Crhistopher Nolan knowing about it. Warner is generous on the payouts to talent and almost all relationships will be fine. There was also significant employee turnover across Warner Media. In general, I view it as a positive. They were structured with overlapping fiefdoms and now they are not. I have heard very good things about the new people brought in. That said, the biggest risk is that Jason Kilar can be too aggressive and make a decision that is too risky.

3)      DISH becomes a strong forth player or drags all carriers into a price war. I spent a lot of time on this risk. Usually entrants generate a price war to get acquired. In this case, I’m not sure regulators will allow it, which should act as a deterrent. I do not believe their network will be good enough to win in postpaid or many enterprise use cases. There will be spots that are competitive but not overall.

4)      Warner media content takes a turn for the worse. I think the team in place is very good. Hamada is doing well with DC, Toby has a great track record at Warner and Casey has a great track record at HBO. The outgoing people at HBO were not drivers of big hits, they did not lose talent. That said, big hits are unpredictable and they may fail.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


HBIO subs after the AVOD launch and international launch. 


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