Virtually all analyses of AT&T’s spinning out Warner Media and DirecTV focus on the “back to the core business” implications. Some of us might argue there is a strategic rationale for owning assets as a portfolio, without full control.
There are many advantages.
Connectivity providers do not destroy value by insisting every asset contributes directly to the communications revenue stream, products or positioning. If one owned a minority stake in Amazon, Google, Facebook or other assets, one would not insist that those marketplaces, apps or platforms be available “only on our network; only under our brand; only under terms that require buy-through of our other services.”
Executives are able to grow their businesses as they deem best, unconstrained by mother ship politics or needs. Business leaders often can create greater value faster, as equity multiples are unburdened by connectivity provider valuation metrics.
Warner Discovery benefits from a pure-play content asset valuation, for example.
Some companies have made an art form out of holding minority stakes in firms without needing control. In other cases majority ownership also is the case, though an argument can be made that overall value growth (equity value, for example) tends to happen when minority interests are held.
That portfolio approach arguably makes lots of sense when incumbents seek to expand their growth profiles by moving up the stack into applications, platforms or apps. In a clear sense, AT&T’s spinning out of Warner Media and DirecTV offers some similar advantages.
Merging Warner Media with Discovery gives AT&T a $43 billion cash infusion while removing the asset from its books. But AT&T still will own 70 percent of the new Warner Bros. Discovery asset.
The sale of DirecTV and related video operations to private equity firm TPG raises $7.8 billion in cash, removes the assets from AT&T’s books, but also allows AT&T to retain 71 percent ownership of the asset.
The move frees AT&T executives to focus on the remaining connectivity core businesses, while retaining exposure to assets that could well produce higher returns than core AT&T. The video entertainment assets generate cash flow, if not equity value growth.
The point, some of us would argue, is that overall asset value growth, profits and profit margins might arguably be higher using a portfolio approach, compared to retaining all the assets within the communications units.
For firms such as AT&T that must deleverage, spinning out assets--even if losing control--might well result in greater overall financial value. That might be true even if the original perceived value of full control and ownership was the ability to consolidate revenue, profits and cash flow for the corporate parent.
True, owning minority stakes in platforms, apps and marketplaces creates overall equity value, but not direct revenue, profit or value for the connectivity unit. But it does create a pathway to diversifying firm value and operations away from strict reliance on connectivity revenue sources.
That might be especially important if one believes the connectivity revenue streams will be under continual pressure, going forward. Many connectivity providers might prefer to say they are something other than “connectivity providers.”
But doing so has proven to be difficult when new lines of business are forced to operate “inside” the connectivity operation. Let them remain outside. Simply own a portfolio of valuable and growing businesses that complement the connectivity core, without stifling them. If at some point in the future it makes sense to reshuffle assets, missions and roles, that can be done later.
If one believes the connectivity business will be under pressure in coming decades--struggling to provide value and hence earning high profit margins and gross revenue--then a transition to additional lines of business is essential, as difficult as that might be.
A portfolio approach has much to offer.
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