The top management of AT&T Inc. T recently debriefed investors about the underlying growth opportunities and the subsequent core business focus post its game-changing deal with Discovery, Inc. DISCA. Notably, the carrier aims to spin off its media assets and merge them with the complementary assets of Discovery. John Stankey, the chief executive officer of the company, also shed some light on its continued business transformation initiatives to create long-term value for shareholders.
Post completion of the deal, AT&T will receive $43 billion in a combination of cash and debt securities and will own 71% of the new entity, while Discovery will own the remainder. The transaction is expected to enable the carrier trim its huge debt burden and focus on core businesses. Markedly, AT&T intends to achieve a leverage ratio target of 2.5 by the end of 2023. The company has been divesting its non-core assets to increase its liquidity and shed excess baggage to be nimbler. Earlier, it inked an agreement in first-quarter 2021 with private equity firm TPG to divest its U.S. video business. AT&T is likely to receive $7.6 billion from this transaction, while retaining stake within the newly formed DIRECTV. The cash resources are likely to be utilized to augment its network infrastructure throughout the country and expand its fiber footprint to cover 30 million customer locations by year-end 2025 along with 200 million 5G customers by year-end 2023.
The separation of the media assets are likely to offer the company an opportunity to better align its communications business with a focused total return capital allocation strategy. Moreover, a focused entertainment company is likely to be better placed to capitalize on the booming direct-to-consumer (DTC) streaming services market and unlock value from media assets. This, in turn, could help it to reinvest in the new entity for more content and digital innovation in order to scale the global DTC business. The transaction is expected to generate cost synergies of $3 billion per year resulting from technology, marketing and platform savings with consolidation of DTC capabilities and elimination of duplicate initiatives.
AT&T expects annual free cash flow of $20 billion post completion of the deal. Notably, the company had a dividend payout of 65% in first-quarter 2021. However, post divestment, the carrier aims to reduce this payout to 40-43% as it intends to utilize about $8 billion of annual cash flow for dividends, down from $15 billion last year. AT&T believes that the deal is likely to create attractive shareholder return, with investors having the option to maintain their stake in the new entity or sell the same for any other investment option.
AT&T is increasingly focusing on its customer-centric business model to attract and retain customers for a lower churn rate. The company is witnessing healthy momentum in its postpaid wireless business with increased adoption of higher-tier unlimited plans. This, in turn, is expected to result in year-over-year growth in wireless customers with unlimited tariff plans. With solid network coverage, the company continues to expect annual revenues to grow in low single digit on a CAGR basis with adjusted earnings growth of mid-single digit.
The stock has lost 0.4% in the past year against the industry’s growth of 15.5%.
We remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the industry are Cogent Communications Holdings, Inc. CCOI and ATN International, Inc. ATNI, both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Cogent delivered a trailing four-quarter earnings surprise of 29%, on average.
ATN International delivered an earnings surprise of 424.2%, on average, in the trailing four quarters.
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