Two wrongs don’t make a right for
The telecom giant might consider that mother’s wisdom when deciding whether it should unwind its 2015 purchase of DirecTV. Buying the satellite programming business might not have been a great deal in 2015, and a slimmer AT&T could look better now that activist Elliott Management is banging around the company.
But separating DirecTV would remove cash flows that it needs to pay a dividend and service debt, not to mention invest in its business. Its options for a decent deal are limited, and it would have to be a blockbuster to make sense.
DirecTV has been struggling since AT&T bought the business for $49 billion in 2015. Satellite video connections fell 2.6% in 2017 and another 6% in 2018. DirecTV Now, the division’s over-the-top streaming offering, hasn’t changed the equation. Operating revenues in AT&T’s entertainment division, which also houses broadband operation U-Verse and other dwindling legacy voice-and-data businesses, fell more than 7% last year. Carving out DirecTV might prove a short-term boost to AT&T’s share price, which has significantly underperformed competitor Verizon over the past three and five years. Elliott, which came after AT&T last week, wants it to focus and streamline. Digesting the acquisition of Time Warner, now WarnerMedia, could be easier without nursing a dying business. DirecTV also has a willing suitor. DISH co-founder and chairman
touted the value of the combination at a conference this week, according to reports. But even Mr. Ergen admitted that there might be regulatory blowback. Furthermore, DirecTV gives AT&T something that it needs: cash. It may be shrinking, but it is a mature business. The whole entertainment segment should generate close to $10 billion of earnings before interest, tax, depreciation and amortization this year—roughly 17% of the company’s total, according to Baird Equity Research. Baird pegs DirecTV’s Ebitda near $8 billion—a hefty chunk of that. To keep its dividend yield at around 6%, AT&T needs to pay out at least $15 billion a year, or more than half its expected free cash flow, all while servicing a debt load approaching $200 billion. If DirecTV’s value had gone up in the interim, perhaps forgoing those future cash flows might be worth the effort. Under the circumstances, AT&T shouldn’t be hitting rewind.
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