By Thomas Gryta
After an eight-year drought, AT&T Inc. Chief Executive
Randall Stephenson finally has the kind of big deal for which the
nation's largest telecommunications company is known.
The company this week got a nod from federal regulators to
complete its $49 billion takeover of satellite-TV provider DirecTV,
handing Mr. Stephenson a legacy-making transaction that could rival
those of his predecessor.
The DirecTV deal isn't a slam-dunk. It gives AT&T an
additional 20 million U.S. pay-TV customers, a national footprint
to expand video delivery, and another $33 billion in annual
revenue. But it also pairs the carrier with a business that is past
its prime as Americans increasingly disconnect from pay TV. DirecTV
has endured years of sluggish subscriber growth in its core
satellite business and lacks any broadband infrastructure needed
for streaming television.
The need for an acquisition was on display Thursday when
AT&T--the country's largest telecommunications company by
revenue and second-largest wireless company by
subscribers--reported second-quarter results. Revenue increased
1.4%, while the number of new mainstream wireless subscribers fell
60%.
Once again, the company lost phone customers but that decline
was offset by new tablet subscribers.
Wall Street analysts have evolved in their thinking about the
DirecTV deal from reticence to a more favorable assessment seeing
the value in the additional cash flow as well as the improved
profitability from at least $2.5 billion of cost cuts. It will also
put Mr. Stephenson in the center of a changing landscape of media
and telecom as television watching leaves the living room for
mobile devices like tablets and smartphones.
Mr. Stephenson, a three-decade veteran at the carrier, is in
need of a boost. Since he took the helm in June 2007, AT&T's
stock has an annualized return of about 3.2% a year, including
dividends. That underperformed the S&P 500 index by about 3.5
percentage points.
Annual revenue growth since 2007 has averaged just 1.6%,
according to data from FactSet.
The company's shares were up 2.2% to $34.65 in after-hours
trading Thursday. The shares closed 34 cents lower to $33.93 in 4
p.m. trading on the New York Stock Exchange. Wireless margins
exceeded forecasts in the latest quarter, helped by higher monthly
phone bills from customers, New Street Research analyst Jonathan
Chaplin said. The company lowered its capital spending plans, he
said.
Overall, the company's second-quarter profit dropped 14% to
$3.04 billion, as integration related expenses from prior deals
weighed on the results. Revenue edged up to $33.02 billion.
AT&T is painting the DirecTV deal as a bet on video, which
is driving the rapid growth in mobile-data consumption. The
satellite-TV business is declining but AT&T is interested in
the cash it gets from subscribers to help fund its other network
investments. As the biggest pay-TV provider, AT&T could have
more bargaining power with content companies.
"We are more confident than ever about the opportunity this
transaction brings," AT&T Chief Financial Officer John Stephens
said on a conference call Thursday.
The strategic logic of buying what some call a "melting ice
cube" was a tough sell--even internally. Several of Mr.
Stephenson's top lieutenants weren't initially enthusiastic about
buying the struggling satellite company, according to two people
familiar with the matter. General Counsel Wayne Watts came out in
early support when others preferred other options, they said.
But the DirecTV deal cleared an important hurdle for Mr.
Stephenson: it was unlikely to face much regulatory resistance.
After regulators blocked AT&T's attempt to buy T-Mobile in
2011, AT&T took a breather from thinking big. It pursued
smaller deals and repurchased almost $28 billion of its own stock,
according to financial data firm Calcbench.
Mr. Stephenson kept an eye out for a transaction big enough to
move the needle for a company with $132 billion in revenue and that
would pass muster with regulators.
Deal-making is core to AT&T's tradition. Mr. Stephenson's
predecessor, Ed Whitacre, was a serial acquirer who used more than
$200 billion in takeovers to vault the carrier from a regional
telephone company to one of the nation's biggest.
Mr. Stephenson grew up in that culture. He joined what would
later become AT&T in 1982 and worked his way through the
finance department until he became the company's top finance
executive in Mexico, working under billionaire Carlos Slim. During
that time he befriended Mr. Slim and was so intent on learning
Spanish, Mr. Stephenson forbade anyone from speaking to him in
English.
He became chief financial officer in 2001 and Mr. Whitacre's top
lieutenant in 2004.
Early into his tenure as CEO, Mr. Stephenson broke from his
mentor, Mr. Whitacre, and moved the company headquarters to Dallas,
away from San Antonio, the area where Mr. Whitacre still lives. Mr.
Whitacre criticized the move in his memoir and said learning of the
relocation was the saddest day in his life other than the death of
his parents.
Mr. Stephenson hasn't shown the same kind of deal-making acumen.
In 2011, after striking an agreement to buy T-Mobile, AT&T
stuck to its playbook that had always worked in Washington--a media
blitz, an army of lobbyists and interest groups to rally
support.
AT&T was still preparing major concessions to woo
regulators, according to people familiar with the interactions,
when antitrust enforcers sued to block the deal.
AT&T's board was displeased that the nine-month pursuit
ended so badly, but interpreted the government's move as part of
anticonsolidation politics and didn't blame Mr. Stephenson for the
failure, a person familiar with the board said.
In the face of tough U.S. regulators, Mr. Stephenson largely set
his sights on Europe for growth, but saw an opening after Comcast
Corp. announced its intention to buy Time Warner Cable Inc. in
February 2014. Mr. Stephenson thought the giant cable merger would
soak up enough scrutiny in Washington that an AT&T deal would
get through, people familiar with the matter said.
Some of his top executives pushed for an acquisition of Dish
Network Corp., a satellite-TV broadcaster that controls large
swaths of wireless spectrum that would be valuable to AT&T,
according to people familiar with the deliberations. But a deal for
Dish would come with a rich price and risks that U.S. regulators
wouldn't approve such an acquisition, they said.
Mr. Stephenson was long interested in DirecTV and reopened
dormant talks. A deal was hammered out in a matter of weeks,
company executives said.
As the deal came together, it was clear the shadow of the
T-Mobile fiasco was in the room, one person familiar with talks
said. AT&T wanted to make sure it was "very, very comfortable"
that the transaction could get past regulators, according to a
person familiar with the matter.
The final decision came down to Mr. Stephenson, said another
person close to the situation. Even in the face of dissent from key
deputies, he pulled the trigger.
Write to Thomas Gryta at thomas.gryta@wsj.com
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