AT&T’s Acquisition Binge Gone Awry: The Actual Cash in its $19 Billion “Non-Cash” Write-Off

AT&T’s Acquisition Binge Gone Awry: The Actual Cash in its $19 Billion “Non-Cash” Write-Off

$157 Billion in Debt. A reckoning of sorts. “Asset impairments and abandonments,” AT&T calls it.

By Wolf Richter for WOLF STREET.

After a horrendously expensive acquisition spree of legacy companies that included DirecTV and Time Warner – with the purpose to disrupt, one would suppose, but disrupt what exactly? – AT&T today disclosed that it wrote off $16.4 billion in assets in Q4, for a total $18.9 billion write-off in the year 2020. The billions are going over the cliff so fast these days it’s hard to even see them.

Today’s disclosure includes $15.5 billion in write-offs for its DirecTV business. “Asset impairments and abandonments,” AT&T calls them.

A write-off is an expense on the income statement that crushes net income. For Q4, AT&T ended up with a net loss of $13.8 billion. For the year 2020, it booked a net loss of $5.2 billion.

AT&T called this write-off a “non-cash” expense – to insinuate that it doesn’t matter, and Wall Street analysts go along with this view because they’re hyping AT&T’s stock and they don’t want write-offs to matter. And true, today’s act of writing off those assets was an accounting entry that didn’t today involve cash, but acknowledged a reality that did involve cash at the time – lots of cash.

Back when those assets were purchased, lots of cash was involved, including the company’s own form of cash, namely its shares.

AT&T had acquired DirecTV for $67 billion, including the assumption of DirecTV’s debt, in 2014. The deal closed in 2015. It paid shareholders of DirecTV a total of $48.5 billion, or $95 a share, in a mix of cash and AT&T shares. The cash was borrowed, therefore saddling AT&T with more debt; and the AT&T shares were freshly issued, thereby diluting existing shareholders.

So this cash was spent on the acquisition back then, not today. It wasn’t accounted for as an expense back then because it was considered an investment. But some of this cash that AT&T incinerated on the DirectTV deal was counted as an expense today. Today was a form of catch-up accounting of the money AT&T incinerated back then.

Then in 2018, AT&T acquired Time Warner for $108.7 billion. These and other deals saddled AT&T with a gigantic mountain of debt, $157 billion. S&P rates AT&T’s debt “BBB,” which is two notches above chunk (my cheat sheet for corporate credit rating scales).

In today’s earnings release, AT&T reported that quarterly revenue in its legacy-video units, which includes DirecTV, fell and that it lost 617,000 subscribers in premium TV; and it reported that revenues in its WarnerMedia units also fell.

But revenues in AT&T’s wireless phone division rose, driven by a 28% surge in equipment sales. Americans went on a record-breaking binge in durable goods purchases, and AT&T got its share.

It remains unclear why exactly AT&T had bought DirecTV in the first place – outside of CEO megalomania, a drive for endless corporate concentration of power, and seemingly endless availability of cheaply borrowed money. And it remains even more unclear why it paid $67 billion for it, a legacy company in the pay-TV sector, in the era of rampant cord-cutting as people were switching to newer technologies and services, such as Netflix and other streaming services.

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Wolf Richter

In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China. WOLF STREET is the successor to his first platform… TP-Title-7-small-200px …whose ghastly name he finally abandoned in July 2014. Here’s the story on that. Wolf lives in San Francisco. He has over twenty years of C-level operations experience, including turnarounds and a VC-funded startup. He earned his BA and MBA in Texas and his MA in Oklahoma, worked in both states for years, including a decade as General Manager and COO of a large Ford dealership and its subsidiaries. But one day, he quit and went to France for seven weeks to open himself up to new possibilities, which degenerated into a life-altering three-year journey across 100 countries on all continents, much of it overland. And it almost swallowed him up.