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AT&T shares sunk amid M&A while Verizon stayed dry in 2018

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AT&T shares sunk amid M&A while Verizon stayed dry in 2018

The diverging M&A strategies of the top four U.S. wireless operators all had significant impacts on the companies' stocks in 2018 and will likely weigh on their performance in 2019, according to analysts.

AT&T Inc., which closed its $106.40 billion transaction to acquire Time Warner Inc. in 2018, saw its stock price lose more than a quarter of its value during the year, having fallen 26.6% between the close of the last day of trading in 2017 and the close of Dec. 31, 2018. While AT&T was far from the only stock to end the year in the red, its losses were significantly greater than those seen in the broader markets, where the S&P 500 and Dow Jones Industrial Average ended the year down 6.2% and 5.6%, respectively.

Verizon Communications Inc., by contrast, spent 2018 reiterating that it had no interest in becoming the owner of a major media property, and it ended the year with its stock price up 6.2%. T-Mobile US Inc. and Sprint Corp. also managed to beat the broader markets, with T-Mobile ending the year almost flat and Sprint ending down just 1.2%.

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Several analysts believe AT&T has been partially impacted by concerns over its heavy debt load and its efforts to adapt to a changing video market. Verizon, meanwhile, has been rewarded for staying on the M&A sidelines and instead focusing on its network. T-Mobile and Sprint have taken a third path, choosing to combine in hopes of reaping the advantages of scale.

"As risk appetites in the broader market have fallen … the telecom sector has mostly hewed to its traditionally defensive role. Verizon has quite sharply outperformed, and Sprint and T-Mobile have both done almost as well, ending the year solidly ahead of the overall market. Only AT&T has continued to lag through this period," MoffettNathanson analyst Craig Moffett wrote in a blog post at the end of 2018, noting that "the market seems (wisely) to have concluded that AT&T is simply too levered to be viewed as anything other than highly risky."

As of the end of third quarter 2018, the company's most recent reported results, AT&T had total debt of more than $183.50 billion. The company has set a goal of cutting $18 billion to $20 billion of its debt by the end of 2019.

Verizon ended the same period with total debt of $112.94 billion. "Companies like Verizon are being rewarded for having stuck to their knitting and having avoided bad deals," Moffett said.

Other analysts have expressed concerns about AT&T's plans to leverage its media assets by launching a direct-to-consumer streaming service. The service, expected to launch in the fourth quarter of 2019, is set to include WarnerMedia's collection of films, television series, libraries, documentaries and animation.

BTIG LLC analyst Walter Piecyk is not convinced the streaming service will be attractive enough to lure customers away from other options, such as Netflix Inc. or Amazon.com Inc.

"At this point, we don't believe AT&T will be able to attract a material number of customers to their DTC offering. Why would they? If consumers can get Friends and West Wing alongside over $5 billion of original programming from Netflix at $8-$14/month, why would they subscribe to any of AT&T's DTC tiers?" Piecyk wrote in a blog post at the end of 2018.

Jeffrey Kvaal, an analyst with Nomura's Instinet, said in a research report that "AT&T does not intend to compete with Netflix, which it characterizes as more of a warehouse of impressive content." Instead, AT&T plans to offer a direct-to-consumer offering centered on its HBO platform. "It will include a core platform of movies, original content, as well as content from the library of Warner Bros. Longer term, AT&T expects to invest in third-party content for the DTC platform as well," Kvaal said.

Overall, Kvaal agrees AT&T faces competitive pressures that are taking a toll on the stock price, noting "uneven execution has led to a record-low valuation."

But he is more bullish on AT&T looking into 2019, selecting the telco giant as a top stock pick for the new year. "Steady gains in mobile, slowing declines in Entertainment EBITDA, and rising [free cash flow] should ease debt, dividend concerns," Kvaal said.

As for T-Mobile and Sprint, their big story in both 2018 and 2019 is their pending merger. The companies are seeking regulatory approval and analysts remain on the fence about the odds for a successful close.

"While the T-Mobile-Sprint transaction makes sense from an industry perspective, we continue to view the regulatory hurdle as high," Kvaal said, noting that he does not believe "careerists" at the U.S. Department of Justice's antitrust division will smile upon a transaction that moves a four-firm market down to three players.

"We continue to remain bearish on approval likelihood while investors seem to have taken a more optimistic view," Kvaal said.

Moffett shares Kvaal's skepticism on the deal. "We've stuck to our 50/50 odds, and have rejected the recent chorus that has argued that 'tea leaves' point to rising odds for deal approval," Moffett said, adding that he expects a decision on the deal in the second quarter of 2019.

He noted that even if the deal does win approval at the federal level, there are still "ongoing state-level antitrust investigations in New York and California" that could threaten the deal.