AT&T (T 0.77%) getting into the media business didn't make much sense when it was doing the deals. Today, $170 billion in debt later, it's understandable why the company is now abandoning the space.

The carrier's $43 billion deal to merge its WarnerMedia division with Discovery Communications (DISCA) (DISCK) is smart, even if it causes a lot of pain for investors. After all, many income investors bought the stock for its dividend and will now see it cut in half, but they'll also own 71% of the new company.

Still, AT&T winds up back where it was before the spending spree, and the telecom industry hasn't been idle. Investors need to ask whether the streamlined carrier can effectively compete against Verizon Communications (VZ 0.43%) and still be a good investment (despite the dividend hit), or is it dead money?

AT&T salesman demonstrating phone to couple

Image source: AT&T.

Back to square one

It was just three years ago that the telecom acquired Time Warner in an $85 billion deal that attempted to create a massive, vertically integrated content and distribution company. Other carriers were doing the same thing.

Verizon had its own ill-advised acquisitions of AOL and Yahoo, which it just agreed to sell for around $5 billion, or about half of what it paid, while T-Mobile (TMUS -0.50%) bought Layer3 TV, though for a relative bargain price at just $325 million. However, it just shut down its TVision Live at the end of April and will instead partner with YouTube TV, which is operated by Google under Alphabet.

AT&T, though, argues that buying Time Warner was sound then, and remains so because it created substantial value for investors. The advent of the HBO Max streaming service, which necessarily needed the branding and content WarnerMedia brought with it, is the company's proof that the acquisition was worthwhile.

Yet like its 2015 acquisition of DIRECTV -- which it likewise is spinning off into a separate entity, partly owned by the hedge fund TPG Capital -- content, distribution, and data in one package never really paid off in a tangible way for shareholders. And the selling price AT&T is getting for its assets indicates it either overpaid or their value has diminished greatly in the ensuing years -- or both. 

Conserving cash

The more-focused path AT&T is putting itself on certainly gives it a clearer strategy for improving cash flows. By spinning off the capital intensive media businesses, it should free up billions in excess cash that in a few years could be returned to shareholders, perhaps as stock buybacks at first.

AT&T's goal is to reach a leverage ratio of 2.5 and generate free cash flow of $20 billion, and while the dividend payout has been slashed, investors are also essentially receiving a lump sum payment of several years' worth of dividends in the form of the new Warner Bros. Discovery stock.

AT&T shareholders will own 71% of the new company, with Discovery investors owning the remaining 29%, while AT&T gets $43 billion from a combination of cash and debt. The newly formed company will be saddled with $58 billion in existing debt.

Next-generation airwaves

That leaves AT&T to focus intently on its mobile business. Most recently, the company spent some $23 billion to acquire over 1,600 C-band spectrum licenses. But Verizon was active, too, spending over $45 billion to acquire some 3,500 licenses. Even so, both Verizon and AT&T will lag far behind T-Mobile, which acquired a huge inventory of mid-band spectrum when it bought Sprint last year for $26 billion.

C-band spectrum, specifically the mid-band in the range of 3.7 GHz to 3.98 GHz, is crucial to the rollout of 5G networks in the U.S. because it's said to provide the carriers with a balanced blend of coverage and bandwidth.

Of course, 5G is expected to run across low-, mid-, and high-band spectrum, but it's the mid-band where the new network will predominate, and T-Mobile will far and away be the leader with over 300 MHz of the spectrum. Verizon will be a distant second with 192 MHz, and AT&T will be third at under 170 MHz of spectrum.

A diminished future

While AT&T will no longer be a sprawling agglomeration of businesses, but rather a narrowly targeted telecom once more, it should be better off, especially in its capital allocation. However, management still sees only modest annual revenue and profit growth in the low to mid single digits, and returns well behind that of its rivals.

Unwinding all those deals was better done now, but AT&T will still carry debt that is substantial, though more manageable. Without a big dividend providing a buffer, however, investors might find the telecom stock's performance is just as much of a drag.