The move will broaden AT&T's holdings as other businesses plateau, and move it closer to Comcast's (CMCSA) - Get Comcast Corporation Class A Report model. However, the new AT&T will encounter a common predicament for conglomerates: with diversity comes complexity. The merged companies will present Wall Street with a more complex bundle of assets and operations to value, and management with a large array of businesses and priorities to balance. That's just the kind of predicament that can unsettle investors and trigger activist action.
"For sheer size and complexity, it would be hard to describe the post-merger AT&T as anything other than a conglomerate." said MoffettNathanson analyst Craig Moffett, in an email. "Giant companies often talk about synergies and benefits to scale, but history suggests that conglomerates trade at a discount precisely because the lack of focus and clarity of mission tends to lead to chronic underperformance."
Consider the old Time Warner. Just about a decade ago, Carl Icahn hired Lazard to produce a 371 page report arguing for the break-up of the New York media group. In addition to Warner Bros., HBO and Time Warner's other production businesses, the assets included AOL (acquired by Verizon (VZ) - Get Verizon Communications Inc. Report ), Time Warner Cable (being acquired by Charter Communications (CHTR) - Get Charter Communications, Inc. Class A Report ) and Time (TIME) publishing (spun off).
To be fair, the old Time Warner was burdened with legacy media assets like print magazines and AOL's dial up Internet business, which had not yet developed the ad tech acumen that Tim Amstrong brought.
AT&T won't have the legacy AOL and Time properties. It will own its core landline and telecom businesses, recently acquired properties in Latin America, DirecTV and the entire Time Warner portfolio. "At some point it's hard to separate these businesses and really truly be able to value them," said Fitch analyst John Culver, who put AT&T on negative watch following the deal.
Investors are looking for the strategic path beyond diversification, Edward Jones analyst Dave Heger observed.
"People are still struggling with how do you strategically take this content and turn it into new services or new revenue streams," he said.
"There has been fear with cable channels, whether it is TBS or CNN, that overall pay TV subscriber levels have been dropping off," Heger added. "To what degree are those revenue streams at risk? How do you offset that with taking this content and monetizing it in other ways?"
Comcast provides a precedent for a vertically consolidated content production and distribution company. The company agreed to buy 51% of NBCUnversal from General Electric (GE) - Get General Electric Company Report in 2009, and closed the deal in 2011. Comcast rolled up the remainder in 2013, combining NBC's television network, the Universal studio and other assets with Comcast's leading cable TV systems and other properties.
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The Philadelphia media group is not a perfect comparison, however.
For one, Comcast paid 9 times projected Ebitda for NBCU in 2009, according to MoffettNathanson, while AT&T is paying 12.1 times projected Ebitda for 2017.
Moreover, Comcast made its bid for coming out of the recession. NBCUniversal was arguably a turnaround candidate. "A lot of potential value was probably hidden," Edward Jones's Heger said. "Comcast has had a lot of success improving the asset and driving a lot of value out of it."
The Time Warner deal comes at a different stage in the cycle. "The markets have had a big run and certainly Time Warner shares have reflected some of that." Heger said. "It's not like AT&T is getting the asset on the cheap."
While AT&T is paying up, CEO Randall Stephenson told investors Monday that Time Warner's free cash flow will improve its ability to pay its dividend, which Moody's project will grow from $12 billion a year to $14.5 billion. "The structure of the deal allows us to maintain a strong balance sheet and strong investment-grade credit metric," Stephenson said.
Time Warner CEO Jeff Bewkes said during the same call that innovations involving AT&T's distribution systems and Time Warner's content would provide growth. "We need to go where the consumers are going, and that's increasingly mobile, increasingly multi-platform, and it's increasingly on-demand through new services via direct consumer relationships over broadband, and this aligns us with all of that," Bewkes said.
T-Mobile USA (TMUS) - Get T-Mobile US, Inc. Report CEO John Legere, a persistent antagonist of the Dallas telecom who was kicked out of an AT&T party at a trade conference in 2014, and Sprint (S) - Get SentinelOne, Inc. Class A Report CEO Marcelo Claure predicted in respective earnings calls that the merger would distract AT&T from its wireless business, and allow them to take more subscribers.
If underperformance in the market or an imbalance in media and telecom valuations causes shareholders to agitate, AT&T will not have one of the protections that Comcast has. The family of Chairman and CEO Brian Roberts owns a controlling position on Comcast, which could deter an activist.
AT&T, which did not respond to a request for comment for this story, may develop new forms of content delivery and innovative business models that combine its formidable wireless networks with Time Warner's premier film and TV properties. For management and investors, it will be a complex proposition.