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AT&T Reportedly Finds Microsoft as Gaming Business' Suitor

Zacks Equity Research

According to industry grapevines, AT&T Inc. T has reportedly garnered interests from blue-chip technology firm Microsoft Corporation MSFT for acquiring its gaming business. The held-for-sale business, dubbed the Warner Bros. Interactive Entertainment, has apparently evoked positive responses from other potential suitors in the gaming arena as well, such as Take-Two Interactive Software, Inc. TTWO, Activision Blizzard, Inc. ATVI and Electronic Arts Inc. However, no official statement has yet been made by any of the firms involved in the negotiation process. 

The gaming business was acquired by AT&T as part of the blockbuster buyout of the Time Warner assets in 2018 for $85 billion. The transaction inflated the debt burden of the company, forcing it to devise ways to cut operating costs and unload assets to improve its balance sheet position. The division, which owns some of the famous games in the market like Harry Potter: Wizards Unite, Mortal Kombat 11, Game Of Thrones Conquest and the Lego and Hitman franchises, is likely to lure a fair deal to the tune of nearly $4 billion.

If the deal is consummated, Microsoft is likely to integrate AT&T’s gaming business within its Xbox Game Studios and strengthen its footprint in this niche market. Markedly, the held-for-sale business of AT&T has game-development studios in the United States, Canada and the United Kingdom. The possible acquisition of such coveted assets is likely to give Microsoft the requisite firepower to combat Sony and its blockbuster PS5 launch in late 2020.

On its part, AT&T could still aim to generate some revenues from this business post the divesture through licensing agreements. Notably, the company has closed the sale of a secondary offering to de-risk its capital structure as it prepares to navigate through the coronavirus-induced global turmoil. The debt offering included Global Notes due 2028, 2032 and 2038 worth €3 billion in combined principal value and $12.5 billion worth of Global Notes due 2027, 2031, 2041, 2051 and 2060. AT&T generated a cumulative $15.8 billion from the secondary offering, proceeds from which were utilized to repay all the outstanding principal amount of six series of bonds totaling about $8.6 billion and term loans aggregating $6.3 billion.

As of Mar 31, 2020, AT&T had $9,955 million of cash and cash equivalents with long-term debt of $147,202 million compared with respective tallies of $12,130 million and $151,709 million at the end of fourth-quarter 2019. The company currently has a debt-to-capital ratio of 0.46 compared with 0.52 for the sub-industry. The times interest earned has decreased slightly over the past few quarters to 3.3 relative to 3.9 for the sub-industry.

Markedly, AT&T was scheduled to retire $4 billion worth of stocks under two accelerated share repurchase agreements. The company intended to retire about 250 million shares through April 2020. However, AT&T decided to cancel the stock buyback program due to the severity of the coronavirus outbreak. The evolving nature of the disease and its grave effect on the economy have forced the company to reconsider the buyback plan, as it is yet to fathom the impact on its business. Management has also withdrawn its guidance for 2020.

Moving forward, AT&T is committed to its three-year financial framework, which is expected to drive significant improvements in margins and bottom-line growth with sustained investments and debt reduction. For 2020 to 2022, AT&T continues to expect consolidated revenue growth of 1-2% per year. Adjusted earnings are expected to be $4.50-$4.80 per share by 2022, with adjusted EBITDA margin of 35%. While adjusted EBITDA margin is expected to be stable in 2020, it is likely to grow in 2021 and 2022, driven by extensive companywide cost-reduction plan, WarnerMedia synergies, continued Mobility growth and AT&T Mexico EBITDA growth. Free cash flow is anticipated between $30 billion and $32 billion for 2022, with net-debt-to-adjusted EBITDA of 2.0X to 2.25X, as 100% debt related to the acquisition of Time Warner assets is likely to be repaid.

We are impressed with the focused attempts of this Zacks Rank #3 (Hold) company to maintain a competitive edge amid these turbulent times.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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