Text size
A DirecTV technician performs an installation in California.
Patrick T. Fallon / Bloomberg
AT&T’s complex transaction to eliminate DirecTV and its other pay TV businesses has met with generally positive reactions on Wall Street for its strategic intent, but not for its potential financial impact.
Some analysts see the transaction as the first step towards a second deal – presumably a merger with a satellite competitor
Dish Network.
The negative aspect is that it will weigh on AT&T’s cash flows and profits in the short term, possibly increasing the pressure on the company’s high dividends.
AT&T (ticker: T) shares fell about 2.2% in Friday’s trading session, to about $ 28. The S&P 500 index fell 0.2%.
The transaction, announced late on Thursday, will see AT&T split its pay TV operations – which include DirecTV, AT&T TV and U-verse – into a separate entity later this year. There are several moving parts.
AT&T will hold 70% of the new DirecTV’s ordinary capital, a stake valued at $ 4.2 billion, in addition to obtaining $ 4.3 billion in junior preferred shares with a 6.5% cash payment yield. Private equity firm TPG Capital is paying $ 1.8 billion for senior preferred shares with a 10% cash yield and will also receive 30% of the entity’s common shares. Finally, the new DirecTV will take on $ 6.2 billion in new debt.
Proceeds from the purchase of TPG and the debt issue will go to AT&T, providing it with $ 7.6 billion in cash in advance. The company will use this money to reduce its existing debt.
There are some additional difficulties: AT&T will be responsible for the first $ 2.5 billion in losses from DirecTV’s NFL Sunday Ticket, the new DirecTV also takes on $ 200 million of AT&T’s existing debt and there are tax implications to be disclosed. But putting it all together, AT&T attributes a business value of $ 16.3 billion to the new DirecTV.
“As for the value of the transaction, we admit to being confused and listened to by a large number of investors who are also; we assume that such a confusing presentation is somehow purposeful, ”wrote JP Morgan analyst Phil Cusick on Friday. “Regardless of the stated value of the deal, we believe it should be sufficient to say that AT&T is receiving ~ $ 7.6 billion in cash upfront, holding 70% of ordinary capital and receiving a good portion of the medium-term cash flow assuming everything will well.”
AT&T management said on Thursday that it expects to get about $ 1 billion in distributions per year from the new DirecTV dividend on common shares. But that will depend on DirecTV’s operating results.
With the details still somewhat obscure of the spin-off out of the way, analysts turned their focus to the strategic and long-term financial implications of the business for AT&T. Several saw this as an opening for a future merger with Dish (DISH) that could help consolidate the U.S. satellite TV industry. AT&T’s 70% stake in the new entity means that it can still benefit, but separating AT&T’s core business means it may not face as much regulatory headache and distraction in a potential transaction.
Dish President Charlie Ergen called the DirecTV-Dish combination “inevitable” last fall. This could happen as early as 2022.
Despite known cable-cutting pressures and the exodus of subscribers since AT&T purchased DirecTV in 2015 – for about $ 66 billion, including debt – the business has remained profitable in its decline. The company’s video segment generated $ 28.6 billion in revenue, down 11%, and almost $ 4 billion in Ebitda – or earnings before interest, taxes, depreciation and amortization – which fell 12% compared to 2019 That was about 7% of AT & T’s $ 54.5 billion in adjusted Ebitda in 2020, which excludes some unique costs, including a $ 15.5 billion reduction in – you guessed it – DirecTV. AT&T lost about 3.3 million video subscribers last year, ending with just over 17 million.
By breaking it down, AT&T loses DirecTV’s contribution to its earnings and free cash flow, but neither will it feel a drop in revenue.
“This structuring feat materially improves AT&T’s revenue growth profile (to <1%) and maintains a great deal of exposure to the potential synergies of a merger with DISH, at the cost of a higher dividend payment index and slightly higher net leverage. bigger, ”wrote Bernstein analyst Peter Supino on Friday morning.
He calculates a dividend distribution ratio of about 70% for AT&T after the transaction and an adjusted net debt / EBITDA ratio of up to 3.6 times. AT&T dividends currently yield 7.3% per year.
AT&T also loses Bill Morrow to the new DirecTV entity, where he will become CEO. Morrow is a long-standing telecommunications executive who has been in charge of AT&T expense management since 2019 and has earned a reputation as a “cost cutter in chief” – although AT&T CEO John Stankey rejected this characterization on a call to investors on Thursday night. Stankey emphasized the spinoff’s ability to focus AT&T on growth areas like 5G, fiber Internet and HBO Max.
“This is a bad financial transaction, in our opinion, but it can be strategically good for the company,” he wrote
Oppenheimerin
Timothy Horan on Friday. “T’s FCF will be pressured after the deal is closed and the dividend may be at risk. T is losing his spending czar to be CEO of the new DTV, but more focus on growing businesses could help. “
AT&T also has a $ 27 billion wireless spectrum account to purchase and release the newly acquired C band licenses. Investors and analysts will hear from the company on an investor day on March 12, when management is expected to talk about long-term strategy and may reveal new financial goals.
Write to [email protected]