Several weeks ago, I offered a scenario where telecom giant AT&T (NYSE:T) would trade at $40. The stock closed Thursday at $36.52, up less half of 1%. The shares have done moderately better, up 6% year to date. But AT&T shares are down 7% over the past 12 months. The prevailing question continues to be about growth, and whether the company has what it takes to deliver the sort of market-beating performances seen from rival Verizon (NYSE:VZ).
AT&T's smartphone business, which makes up over 90% of the company's phone sales, is still doing well - albeit not dominant when compared to Verizon. Still, in the recent quarter, AT&T's wireless-segment posted decent growth and wireless-data sales soared by 17%. Also, in the most recent quarter, AT&T added more than 2 million new subscribers to its wireless and high-speed broadband service.
This lead to a strong jump in adjusted earnings. In impressive fashion, the company was able to do generate significant interest from smartphone users even as Sprint (NYSE:S) and (especially) T-Mobile (NASDAQ:TMUS) pushed hard with aggressive pricing plans. From my vantage point, investors' fears about the competition have been slightly misguided.
While the prospects for a more serious price war may eventually escalate, AT&T management has shown a strong track record to deliver on the bottom line, where it matters the most. But that's about to come to an end.
With news that the telecom giant AT&T is in advanced talks to buy DirecTV (DTV) for around $50 billion, AT&T is shooting itself in the foot. It seems the company is running out of growth ideas. This is not the first time AT&T has gone to the M&A well. Last year, the company bought Leap Wireless for $4 billion. But management has not been able to extract any value from this deal. This is why the stock has declined 7% since it closed.
This morning, Reuters is reporting that AT&T has consulted investment bank Lazard (NYSE:LAZ) to negotiate the takeover, which it expects to close next week. Recall, it was Lazard that advised AT&T that the deal for Leap was a great idea. Meanwhile, DirecTV, the world's largest satellite TV provider, is said to have consulted Goldman Sachs (NYSE:GS) to advise on its valuation.
The investment banks stand to profit handsomely from this deal. But the deal, which presents no accretive benefits, doesn't make sense. Not to mention, AT&T is paying roughly a 40% premium for a company that is dealing with slowing subscriber growth. And when you factor in DirecTV's debt load of $16 billion, this shoots the total enterprise value to a $66 billion deal.
Granted, money is not the object here. AT&T will have no problem with financing, given that the company generates $35 billion in operating cash flow. But just because you have the money does not mean it should be spent. And management has yet to explain how DirecTV, which has not internet infrastructure, can help AT&T grow its internet ambitions. In the meantime, they've tied up their capital, which will inhibit their ability to maneuver in future wireless auctions.
With AT&T stock trading at around $36 per share, investors should hope that federal regulators protect the company from itself by blocking this deal. But I don't expect a block will happen. At this point, beyond being a good dividend payer, I don't see a reason to buy this stock, given that DirecTV will prevent AT&T from doing the things it needs to focus on to deliver long-term value to shareholders.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.