Corroborating industry grapevines, AT&T Inc. (T - Free Report) has divested its 9.5% ownership stake in Hulu — an American entertainment firm that provides over-the-top streaming services — for $1.43 billion (1.09 billion pounds). Post divesture, Hulu will be jointly owned by The Walt Disney Company (DIS - Free Report) and Comcast Corporation (CMCSA - Free Report) with 60% and 30% stakes, respectively. The joint venture partners have an undisclosed window of time to apportion the buy back shares.
The transaction values the online streaming venture at $15 billion and underscores its growing relevance despite declining revenue trends. Hulu is widely expected to lose $1.5 billion in the current fiscal and has undercut its entry-level, ad-supported version by 25% to $6 a month due to stiff competition from Netflix Inc. (NFLX - Free Report) and Amazon.com's Prime Video. The business is likely to turn profitable by 2023 or 2024 with a projected subscriber base of 40 million to 60 million, increasing significantly from its current tally of 25 million.
On its part, AT&T aims to utilize the sale proceeds to reduce its burgeoning debt burden that swelled to $176.5 billion at year-end 2018 primarily due to the acquisition of Time Warner assets. The company aims to achieve a debt-to-EBITDA range of 2.5x by year-end 2019. Although AT&T expects to reduce debt by utilizing its cash flow and proceeds from the sale of non-core assets, the debt-laden balance sheet is likely to weigh significantly on its coffers.
In a concerted effort to focus more on video streaming service, AT&T has decided to restructure its WarnerMedia business and fine tune its operating model with the evolving needs of customers. AT&T has been ramping up its streaming services with the launch of live TV channels DirecTV Now in 2016, and a cheaper live-TV service WatchTV in 2018. With modest success in these ventures and continued subscriber loss in its DirecTV satellite TV business as users tend to shift to Internet video services, AT&T intends to focus more on video streaming content. The company aims to launch an early version of its HBO-led subscription video streaming service later this year while continuing HBO Now as a separate streaming service.
AT&T seems to be keen to generate additional revenues from more video content and subsequent ads through these videos. This, in turn, would enable the company to capture a greater market share in the digital ad business and augment its position as a media behemoth with significant presence in the telecommunication sector. However, the stock has lost 10.1% over the past year against the industry’s rally of 5.2%.
Nevertheless, with a focused roadmap, AT&T appears poised to turn the tables in 2019, which is likely to be a decisive year for it. The company is set to benefit from solid momentum in its wireless business and continued 5G deployments in multiple U.S. cities. Whether this Zacks Rank #3 (Hold) stock can indeed meet its set targets and perform to its full potential in the year, remain to be seen. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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