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AT&T's Next Smart Acquisition: Bears Still Do Not Understand The Investment Thesis

About: AT&T Inc. (T)
by: The European View

I believe that many bears completely misjudge AT&T's business plan and the actual market in which AT&T is just positioning itself.

The management is transforming the company into a giant whose telecommunications and advertising business is generating unprecedented synergies.

Investors will benefit from this for years, if not decades.

I currently have no reason to believe that management will not achieve these goals.

Since it became public that the hedge fund Elliott acquired a USD 3.2 billion stake in AT&T (T), life returned in the share price performance of AT&T. As I said before, however, the whole thing was a bit bizarre because Elliott's demands contain nothing new, but only familiar. Just look at the key points of the Elliott letter. Nothing of it provided something new to investors.

Source: Key points of the Elliott letter

I was especially surprised about the fact that Elliott wasn't even thinking about the mega advertising market, which might be extremely lucrative for AT&T. This applies to DirectTV as well. Confronted with the demand to sell DirectTV, my conclusion was the following:

Why should AT&T sell DirectTV? Yes, the struggling satellite TV business seems to be a brake pad because of declining premium TV subscribers and declining industry. Yes, DirecTV satellite service went from 21 million subscribers at the end of 2016 to 17.9 million in the second quarter of 2019. But the first thing is, if AT&T sold the DirecTV, the company would get far less than what it paid. Furthermore, I think there is still some value in DirectTV. [...] DirectTV can be used as another distribution channel for AT&T's growing and highly profitable advertising business.

And this is exactly where we come to a point where we see what neither Elliott nor bear investors understand. They still see the company as the telecommunications giant that generates a high cash flow but otherwise reacts sluggishly, that customers run away from and that has to make high investments in 5G. At the same time, they see an overpriced takeover of DirectTV and have to watch as the telecommunication company sets up the Warner deal and takes on exorbitant debt for it.

But what happens is the following: The management is transforming the company into a giant whose telecommunications and advertising business is generating unprecedented synergies. AT&T initially wanted to grow vertically and is now planning a horizontal explosion. Therefore, AT&T bought already existing users through vertical growth and plans to use this potential to create new sources of income. The acquisition of Warner has allowed the company to grow vertically as well as increasing the number of users and data. The catalyst for sales growth through these masses of users will be advertising. Given that, the advertising business will be AT&T's future. AT&T is pursuing a stringent plan here, as the earnings call also shows:

And last, the vast distribution network and subscriber base brings unique viewer and customer insights. Pairing these with our large advertising inventories at DIRECTV and Turner and creating an ad tech platform is a unique opportunity, and every work -- every move we've made has been focused on building these four critical capabilities.

AT&T recently added a new mosaic to the project. Xandr has purchased clypd, an advertising platform that uses data to better target television ads. The company offers media buyers the option of purchasing inventory on open and private marketplaces. Furthermore, it provides optimization tools for advertisers. The acquisition of clypd fits perfectly with AT&T advertising plans.

With its subsidiaries Xandr and Xandr Invest (the former Appnexus), AT&T provides marketers with advanced advertising solutions using valuable customer insights from AT&T's TV, mobile and broadband services, combined with the extensive ad inventory of WarnerMedia's cable networks and AT&T's pay-TV services. Xandr is making AT&T data available to buyers across all media types through AppNexus's demand-side platform.

On the other hand, clypd's technology is used by various TV programmers to serve relevant advertising in linear TV. Prior to the acquisition, AT&T still lacked the right infrastructure for the personalized TV advertising market. That changes now. In addition, new opportunities for cross-platform personal advertising are opening up. Clypd is already established and has many partner companies, both network groups and independent networks:

Source: Network Groups that partnered up with clypd

Source: Independent Network that partnered up with clypd

It is all the more astonishing that many investors have hardly appreciated this news because that's exactly why AT&T refused to sell DirectTV. It would lose a distribution channel for a huge market. And that's why I'm so happy why they didn't listen to Elliott. Many investors seem to forget with all the hype about digitization that TV advertising is still the biggest part of the advertising market.

Source: Development of the advertising market from 2008 to 2018

Some bearish investors may now object that these are all just promises and that the plan has hardly materialized so far. That may be true, but what do such investors expect? It takes time to get such a big undertaking off the ground. And I strongly believe that the management will be able to fulfill the plans. I also have no reason to doubt it, as management has so far overachieved its goals.


AT&T's price per share has risen. This is, of course, good for the investors who were underwater and bad for the investors who wanted to get into the business or who wanted to drip into an undervalued company. Late arrivals don't have to despair. In the long term, I still see a lot of potential in the share. Besides the operational aspects I explained above, AT&T expects to return about USD75 billion (!) in value to shareholders over the next 3 years through USD30 billion of share retirements and USD45 billion in dividends. The management expect to retire about 70 percent of the shares issued for the Time Warner deal. That's more than 10 percent of the company.

Therefore, I am still extremely long AT&T and enjoy the momentum and the juicy dividend for now.

AT&T is part of my diversified portfolio. If you enjoyed this article and wish to receive updates on my latest portfolio research, click "Follow" next to my name at the top of this article, and check "Get email alerts".

Disclosure: I am/we are long T. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.