November 30, 2018
When AT&T acquired Time Warner for $85 billion, the purchase price pushed the telecom’s net debt skyward to about $170 billion by the end of the year.
Corporate debt (debt-to-pre-tax earnings ratio) is a relative thing. Too little and investors worry a company isn’t maximizing revenue potential. Too high and concerns about financing the debt and or worse loom into the picture. Wall Street looks for a company to have a debt ratio between 0.3 and 0.6, according to some analysts.
AT&T will end 2018 with a debt ratio of 2.8.
For CFO John Stephens, who is tasked with decreasing that ratio, the solution involves scrutinizing internal overhead costs, reducing redundancies and liquidating non-core assets — such as WarnerMedia’s 10% stake in Hulu.
WarnerMedia, which includes Warner Bros., HBO and Turner, acquired the Hulu stake in 2016 for $583 million when it was Time Warner. The SVOD and online TV platform with 20 million subscribers is co-owned by Disney, Fox and Comcast and reportedly valued at more than $9 billion.
With WarnerMedia planning to launch proprietary SVOD service in late 2019, co-owning a rival service makes little sense.
Indeed, eliminating corporate headquarters, minority investments in Sky Mexico and Hulu, among other options, could generate AT&T upwards of $8 billion in cash, according to Stephens.
“If we’re successful in that, that would bring us down to that 2.5 [debt ratio] range [by the end of 2019],” Stephens said on AT&T’s Nov. 29 analyst day event. “We’re going to focus on getting that done. With our [$500 billion] balance sheet, we are in a very good position.”
The CFO contends AT&T will have free cash flows approaching $12 billion at the end of the year, which he said will be applied to reducing the debt. The company expects to generate $26 billion in free cash flow in 2019.
AT&T expects to generate $1.5 billion in cost savings (corporate overhead, procurement purchasing, marketing, etc.) and another $1 billion in revenue savings (churn reduction, cross-selling products) by 2021, including $700 million in savings by the end of 2019, $2 billion by the end of 2020.
“People who know our company, know we’re pretty good with cost synergies,” Stephens said. “Sharing assets and capabilities across the business, we can learn from them and WarnerMedia can hopefully learn from us.”