Barclays says AT&T's best way out of its activist investor drama could be selling Turner - here are the likely buyers

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• AT&T is under pressure to prove its $85 billion acquisition of Time Warner will pay off, after an activist investor letter called its M&A strategy into question this week.
• The telecom giant's best path forward might be selling off the collection of Turner cable networks it acquired as part of the deal, Barclays analysts wrote in an investor note on Tuesday. 
• The cable networks could be attractive to buyers like the forthcoming combined CBS and Viacom, which is reportedly shopping for more assets to shore up its content portfolio.
• "In our opinion, cable networks are likely to be the most challenged part of the legacy media value chain and unless AT&T invests in making these businesses more sustainable ... we believe the company would be better off selling this asset now when there is still interest in media deals," Barclays wrote.
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AT&T is under pressure to prove its $85 billion acquisition of Time Warner, now called WarnerMedia, will pay off for investors.

Activist investor Paul Singer's Elliott Management published on Monday a 24-page letter that questioned the company's M&A strategy and called on the telecom giant to clearly articulate its plan for the WarnerMedia assets it acquired last year.

Analysts at Wall Street firm Barclays argued in an investor note on Tuesday that AT&T's next best option may be one Elliott Management didn't consider in its letter: unloading Turner's portfolio of cable networks, such as TNT, TBS, truTV, Cartoon Network, Adult Swim, and CNN.

Those assets operated under the Turner brand during the Time Warner days, but have largely been rolled up into the broader WarnerMedia umbrella - which includes brands like HBO, Warner Bros., and DC Entertainment - since being acquired by AT&T. 

AT&T would be better off selling those cable networks, which would be more attractive to media buyers than other struggling aspects from AT&T's business, like satellite operator DirecTV, Barclays wrote in a note titled, "Activist impact on T likely to be limited." 

"AT&T should sell Turner, which accounts for ~55% of Warner Media EBITDA," the note said. "In our opinion, cable networks are likely to be the most challenged part of the legacy media value chain and unless AT&T invests in making these businesses more sustainable on the lines suggested earlier, we believe the company would be better off selling this asset now when there is still interest in media deals."

CBS and Viacom could be the strongest potential buyers, Barclays wrote. The two companies are in the middle of a deal to recombine, and are rumored to be shopping for other media assets to shore up their portfolio. Together, ViacomCBS, as the new company is to be called, will also have a robust collection of broadcast and cable networks, including CBS, Nickelodeon, MTV, Comedy Central, and Showtime, that could complement the Turner portfolio. 

Read more: M&A experts break down what Viacom and CBS could buy next, from ad-tech to James Bond

Discovery or Comcast could also be potential buyers of Turner, Barclays wrote.

Turner generates about 60% of WarnerMedia's free cash flow, Barclays estimated, or around $2.5 billion to $3 billion annually. So AT&T would look to get more from a sale than what it paid to acquire the networks for through the acquisition of Time Warner.

A Turner sale would also hit on another area that Barclays argued should be a focus for AT&T, and Elliott Management's investor push: shrinking and simplifying AT&T's portfolio.

"In our opinion, one of the points in Elliott's letter that does resonate to some extent is AT&T's inability to articulate and execute upon a cohesive strategy with all its assets," the Barclays note said. "The company's effort to create multiple video tiers with DTV Now, WatchTV, HBO, HBO Max, AT&T TV, doesn't have an anchor. We believe [AT&T] should use its strongest service, wireless, as an anchor and use video to drive down churn and improve retention."

If AT&T were to keep the Turner networks, Barclays argued it should invest in shifting TNT's focus to sports, while moving all the scripted content to TBS and HBO. The company seems to have taken some steps in this direction. It recently realigned all news and sports programming under the leadership of Jeff Zucker, and entertainment programming under Kevin Reilly, both of whom report to WarnerMedia CEO John Stankey.

The Barclays note did not address the potential political impact of a sale of cable-news network CNN, which was part of the legacy Turner brand. AT&T has drawn over CNN scrutiny from critics, including US president Donald Trump, who made AT&T's acquisition of Time Warner a talking point during his presidential campaign.

Trump applauded Elliott Management's efforts to take a more active role in AT&T in a series of tweets on Monday: 

AT&T declined to comment on the speculation about a Turner sale and referred Business Insider to its earlier remarks in statement on the activist letter.

"Our management team and Board of Directors maintain a regular and open dialogue with shareholders and will review Elliott Management's perspectives in the context of the company's business strategy," AT&T said. "We look forward to engaging with Elliott. Indeed, many of the actions outlined are ones we are already executing today."

CBS and Viacom also declined to comment.