Cash Flow or Ownership: Does it Matter?

AT&T’s decision to merge Warner Media with Discovery will inevitably be seen as an unwinding of prior company strategy, following the DirecTV partial asset sale. 

It would not be the first time, as AT&T decades ago assembled and then disassembled the largest collection of cable TV assets in the United States. 

But some might argue it does not matter very much whether AT&T derives cash flow from assets it has a stake in, or owns outright. The new combination of Discovery with Warner Media leaves AT&T with 71 percent ownership of the larger new aset but also $43 billion in cash the firm can use to reduce debt. 

As a full owner, Warner Media generated a bit more than $30 billion in 2020 revenues for AT&T.
The bigger new firm is expected to generate about $52 billion in revenue. That provides AT&T with about $37 billion in annual revenue, based on its 71 percent ownership of the asset. 

So one way to look at the deal is simply to note that, in addition to $43 billion in cash, AT&T immediately gets ownership of a larger revenue stream. 

As some might argue, owning assets in full is less important than generating cash flow. The new collection of assets is poised to produce significantly higher cash flow than the 100-percent-owned Warner Media. 

Some might say that is an example of using leverage productively. 

Others might say AT&T is making a strategy shift, back to focusing on its core connectivity assets. There is a ring of truth there. As much debt as firms such as Verizon and AT&T have taken on to acquire rights to 5G spectrum, it makes sense to deleverage, and content asset sales are one way to do so.

On the other hand, there is significant uncertainty about how much incremental new revenue 5G can generate, and whether it will be enough to compensate for an almost certain loss of half of legacy revenue over the next decade.

Though Verizon and AT&T do need to deleverage, they both also arguably must create big new revenue streams from new services, and not simply a billion dollars here and there. They need to create new businesses producing scores of billions in annual new revenue. 

They might hope to do so with enterprise 5G, but as in the case of fixed network internet access services, even significant gains in market share--if possible-- will not be enough. Though single-digit billion additions to revenue are helpful, they will not be big enough to replace half of current revenue in a decade. That requires scores of billions.