AT&T CEO John Stankey’s greatest company reversal in historical past rejects former boss Randall Stephenson

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John Stankey, senior govt vice chairman of AT&T Inc. merger integration planning, arrives to federal court docket in Washington, D.C., U.S., on Monday, April 30, 2018. 

Andrew Harrer | Bloomberg | Getty Photos

It did not work. It was misguided. It by no means actually made sense to start with. And we’re not talking about Quibi.

AT&T introduced Monday it decided to spin off WarnerMedia, merging it with Discovery to type a brand new media and leisure firm seemingly value nicely over $100 billion.

AT&T’s choice to separate out WarnerMedia comes less than three years after closing its $100 billion transaction, together with debt, is an admission that placing a big content material asset with a wi-fi telephone firm had few long-lasting synergies. If something, WarnerMedia turned an albatross on AT&T shares, which have underperformed Verizon and T-Mobile because the deal’s completion date on June 14, 2018.

AT&T CEO John Stankey also sold a 30% stake in DirecTV and other linear pay-TV assets in February, together with operational management, to TPG. That deal additionally partially unwound a serious AT&T acquisition from only a few years earlier. AT&T spent $67.1 billion, together with debt, on DirecTV in 2015.

Stankey was former AT&T CEO Randall Stephenson’s right-hand man. He had defended the DirecTV and the Time Warner acquisitions prior to now.

However his actions sign one thing that his phrases haven’t: each offers have not labored.

Here is what Stephenson stated about why AT&T should purchase Time Warner proper after the deal was introduced in 2016.

“Why put the 2 firms collectively?” Stephenson said. “The world of distribution and content material is converging, and we have to transfer quick, and if we wish to do one thing actually distinctive, start to curate content material otherwise, start to format content material completely different for these cellular environments — that is all about mobility. Assume DirecTV Now, the brand new product we’re bringing to market. What are you able to do with Time Warner content material actually quick and really uniquely for our prospects? Can you start to combine social into that content material? Are you able to give the potential to … I am watching content material, I wish to clip it, I wish to ship it by way of social media to my mates. Can we iterate on that rapidly, and may we give a novel expertise to our prospects?”

No matter he was speaking about there by no means occurred. As a substitute, this is what has occurred.

Media firms have realized that linear pay-TV is a slowly dying business. That is why Stankey partially unloaded DirecTV, a linear pay-TV distribution enterprise.

Media firms have tried to counteract the lack of pay-TV subscribers with direct-to-consumer providers that enable customers to pay for entry to content material with out subscribing to cable. This has turned leisure giants into distribution platforms, themselves, a la Netflix.

After working WarnerMedia for about two years, Stankey clearly concluded AT&T was at finest not needed as an proprietor of media property and at worse holding the wi-fi firm and the media enterprise again.

“My job because the CEO of AT&T is to end up to the worker physique, who all have good concepts on tips on how to develop this enterprise and the place to take it, and ensure I facilitate these alternatives,” Stankey instructed reporters Monday. “Searching over the following couple years on these nice progress alternatives we’ve at AT&T, whether or not it is mounted broadband, what we do in wi-fi and what we will do in rising the media enterprise, it turned clear to me that we have been going to want a special capital construction to get that completed. It was vital that I not do one thing in my decision-making that prompted anybody to decelerate of their execution.”

Stankey went on to acknowledge that as a substitute of supercharging WarnerMedia, as Stephenson had hoped, AT&T was really holding WarnerMedia again.

“Streaming has developed within the final couple of years,” Stankey stated. “The worldwide alternative from a shareholder accretion perspective is way higher to grab that chance on a stand-alone foundation than it’s to proceed to work on enhancing our home connectivity enterprise.”

In different phrases, Stankey stated including Discovery’s content material and giving WarnerMedia flexibility to spend billions on content material was higher for AT&T than any advantages WarnerMedia offered AT&T wi-fi.

That is as away from an acknowledgement as potential that Stankey concluded vertical integration wasn’t serving to AT&T shareholders.

Elliott’s affect

Whereas Stankey stated he determined in latest months that WarnerMedia wanted a brand new capital construction to higher compete towards rival streaming providers, prompting the cope with Discovery, he severely began to contemplate extracting WarnerMedia from AT&T after activist hedge fund Elliott Administration took a stake in the company in 2019 and publicly chastised management in a letter, in line with folks aware of the matter.

At first, Elliott believed Stankey was part of the problem, helping Stephenson in offers that moved AT&T away from its give attention to wi-fi. However after expediting Stephenson’s retirement and serving to run a seek for a brand new CEO, Elliott came to believe Stankey was actually the right man for the job, stated three of the folks, who requested to not be named as a result of the discussions have been non-public.

Stankey instructed Elliott privately he was his personal man — not a Stephenson clone — and would come to his personal viewpoints concerning the worth of DirecTV and WarnerMedia. After working a months-long extensive seek for a brand new CEO, Elliott determined it will take an opportunity on Stankey being a person of his phrase.

Stankey started to satisfy with monetary advisers to debate a transaction in September, in line with folks aware of the matter. Reaching a cope with Discovery has allowed the brand new firm to have one class of inventory — giving the merged entity flexibility to purchase different media property or promote to a good bigger firm down the street.

Even Elliott was shocked with Stankey’s velocity and willingness to take its recommendation on rationalizing the AT&T portfolio, noting he used phrases Monday comparable to “focuses our administration workforce” and “simplifying AT&T’s funding thesis” that just about replicate language from the hedge fund’s letter, the folks stated.

Stankey additionally impressed Discovery shareholder John Malone on his willingness to be shareholder pleasant together with his choices, one other individual stated.

“It has been a transformational 12 months at AT&T since John Stankey took over as CEO, and at this time’s announcement represents one other spectacular step within the firm’s latest evolution,” Elliott stated in a press release. “AT&T has now executed on its promise to streamline operations and re-focus on its core companies, all whereas enhancing operational execution, enhancing its monetary place and advancing its company governance. As traders, Elliott helps AT&T in its efforts to finest place the corporate for future success.”