AT&T’s fiber diet should help mitigate M&A bloat

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An AT&T logo is seen at a AT&T building in New York City, October 23, 2016.

NEW YORK, Jan 25 (Reuters Breakingviews) - AT&T (T.N) boss John Stankey is getting the telecom titan back in its lane. Even as it pays for wayward forays into Hollywood and satellite TV, it’s taking some big hits on antiquated equipment. A new initiative in fiber represents a step in a more prudent direction.

The $145 billion company on Wednesday disclosed a $25 billion non-cash impairment charge partly related to its landline business. Like dial-up internet of yore, companies and consumers have been ditching the service for wireless options, but rising interest rates also have altered the calculus on future cash flow. AT&T benefited in other ways, adding 656,000 net new mobile subscribers who pay monthly in the fourth quarter, far better than what Verizon Communications (VZ.N) managed.

After pushing DirecTV out the door and shunting Warner Media to Discovery, AT&T is more focused. Its balance sheet is still teetering from the pricey acquisitions, however. Total debt stands at $136 billion, or 3.3 times EBITDA, compared to $82 billion and 2.5 times that measure of profit at the end of 2014, before AT&T embarked on the two transactions.

Meanwhile, AT&T’s core wireless business is slowing down. In the last three months of 2022, the company added a quarter fewer net new subscribers than it did a year earlier. Executives anticipate the trend will continue.

With a big slug of this year’s $16 billion in projected cash flow earmarked for dividends and reducing leverage, Stankey is going back to AT&T’s telecommunications roots. A joint venture with BlackRock (BLK.N) unveiled last month to build out a high-speed network spreads the cost and the risk. In the fourth quarter, AT&T’s average revenue per user for its fiber product was approaching $65, $10 higher than what its non-fiber service fetches. The new venture, dubbed Gigapower, is also positioned to grab a piece of the $65 billion earmarked for broadband deployment in the U.S. infrastructure bill.

AT&T already operates the business in 21 states, where revenue increased 30% in the quarter, to $1.4 billion. Gigapower will help with that expansion. Fiber buildouts are expensive, costing up to $80,000 to lay out each mile, reckons research outfit Recon Analytics. Alphabet's (GOOGL.O) Google and Verizon are also eyeing the sector. At least it’s a venture in AT&T’s wheelhouse, and a higher fiber diet should help mitigate the M&A bloat.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

CONTEXT NEWS

AT&T on Jan. 25 reported 656,000 net additional customers who pay on a monthly basis in the fourth quarter compared to 884,000 in the same period a year earlier.

The U.S. telecom company generated a net loss of $23.1 billion, or $3.20 per share, in the three-month stretch versus net income of $5.2 billion, or 66 cents per share, in the fourth quarter of 2021. AT&T also booked a $24.8 billion non-cash impairment charge in the fourth quarter related to its wireline business, its assets in Mexico and higher interest rates.

AT&T and BlackRock said on Dec. 23 that they are forming a joint venture called Gigapower to build out fiber networks and wholesale the service.

Editing by Jeffrey Goldfarb and Amanda Gomez

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