AT&T Inc. (NYSE: T) is being circled by an expert enemy of companies it thinks are badly run and poorly managed. Elliott Management says that the M&A binge that AT&T has been on the past several years has done nothing but harm the company financially and beat down its stock price. The cap of these acquisitions was the purchase of Time Warner for $85 billion in June 2018. If other institutional investors pressure the company, its best way out of trouble is to sell or spin out the Time Warner assets, now known at WarnerMedia.

AT&T’s debt is huge, $162 billion at the end of the last quarter. AT&T management argues that the revenue and earnings of WarnerMedia will more than justify the cost. Also, there are the “synergies” that will come from owning an entertainment business, cable to the home, satellite TV and a vast wireless system with 160 million subscribers. Among AT&T’s challenges is that such synergies have not been realized before in linkups between entertainment assets and communications infrastructure.

So far, WarnerMedia on its own has not done much for AT&T. In the most recent quarter, its revenue was $8.4 billion, up 5% year over year. What AT&T calls adjusted EBITDA, an odd measure of profits, was $2.1 billion, up 5% as well. That is an annual “profit” run rate of $8 billion. It is hard to justify the $85 billion purchase price unless the synergies are massive.

AT&T management believes the WarnerMedia content can be more effectively marketed than in the past. People will stream WarnerMedia content to their phones. One problem with this strategy is that there is already plenty of content for wireless consumption. Research shows that people may subscribe to one or two streaming content services, but three or four is rare. Maybe AT&T can price its content packages low enough, but that would compress margins. It has to deal with the price points of much more substantial and diverse operators like Amazon and Netflix. Companies like Disney are also crowding into the business as well.

Part of Elliott’s case is that the synergies plan can never be realized. As long as AT&T management pursues the strategy, its stock price will never recover. The math of the cost of WarnerMedia and what it is likely to produce in earnings is compelling.

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