Text size
A DirecTV technician performs an installation in California.
Patrick T. Fallon / Bloomberg
AT & T’s complex transaction to launch DirecTV and its other pay-TV businesses had 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 toward a second deal, presumably a merger with a satellite competitor.
Dish network.
The downside is that it will weigh on AT&T’s cash flows and short-term profits, which could put additional pressure on the company’s high dividend.
Shares of AT&T (ticker: T) fell about 2.2% on Friday, trading at about $ 28. The S&P 500 index fell 0.2%.
The transaction, announced Thursday evening, will cause AT&T to produce its pay-TV operations (which include DirecTV, AT&T TV and U-verse) to a separate entity later this year. There are several moving parts.
AT&T will hold 70% of the common capital of the new DirecTV, a stake valued at $ 4.2 billion, in addition to obtaining $ 4.3 billion in junior preferred shares with an in-kind payment yield of 6.5%. Private equity firm TPG Capital pays $ 1.8 billion for senior preferred shares that yield 10% in cash and will also get a 30% stake in 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 issuance of debt will go to AT&T, which will provide $ 7.6 billion in cash in advance. The company will use this money to reduce its existing debt.
There are a few additional wrinkles: AT&T will be responsible for the first $ 2.5 billion loss for DirecTV’s NFL Sunday ticket, the new DirecTV also assumes $ 200 million of existing AT&T debt and there are tax implications to reveal. But put it all together and AT&T assigns a $ 16.3 billion business value 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 intentional, “JP Morgan analyst Phil Cusick wrote Friday.” Regardless of the established value of the transaction, we think it would be enough to say that AT&T gets about 7 ., $ 6 million in cash ahead, keeping 70% of equity and getting a good share of cash flows in the medium term assuming everything goes well. “
AT&T management said Thursday that they expect to raise approximately $ 1 billion in annual distributions of the new DirecTV from a dividend of common stock. But that will depend on DirecTV’s operating results.
With the details still a bit murky of the derivation, analysts focused on the long-term strategic and financial implications of the deal for AT&T. Several felt it was opening the door to a future merger with Dish (DISH) that could help consolidate the U.S. satellite TV industry. 70% of AT&T’s interest in the new entity means it could still benefit, but separating the company from the AT&T core means it may not face as much harm from any regulator or distraction in a possible transaction. .
Dish president Charlie Ergen called the DirecTV-Dish combination “inevitable” last fall. This could continue as soon as 2022.
Despite well-known cord-cutting pressures and an exodus of subscribers since AT&T bought DirecTV in 2015 for about $ 66 billion, including debt, the business has remained profitable in its decline. The company’s video segment earned revenue of $ 28.6 billion, down 11%, and nearly $ 4 billion in EBITDA, or earnings before interest, taxes, depreciation and amortization, which fell 12% from by 2019. That accounted for approximately 7% of AT&T’s $ 54.5. billion in adjusted EBITDA by 2020, which excludes some one-off costs, including a $ 15.5 billion clean-up from DirecTV. AT&T lost approximately 3.3 million video subscribers last year, to just over 17 million.
By withdrawing it, AT&T will lose DirecTV’s contribution to its revenue and free cash flow, but it will not feel its revenue decline either.
“This structuring feat materially improves AT & T’s revenue growth profile (up to <1%) and maintains high exposure to the potential synergies of a merger with DISH, at the expense of a dividend payment ratio higher and an increase in net leverage, ”Bernstein wrote. analyst Peter Supino Friday morning.
It calculates a dividend payment ratio close to 70% for AT&T after the transaction, and an adjusted net debt / Ebitda ratio of up to 3.6 times. AT & T’s dividend currently generates 7.3% annually.
AT&T also loses Bill Morrow to the new DirecTV entity, where he will become CEO. Morrow is a longtime telecommunications executive who had been in charge of expense management at AT&T since 2019 and earned a reputation as a “head cost reducer,” although AT&T CEO John Stankey, backed that characterization in an investor call Thursday evening. Stankey stressed the spin-off’s ability to focus AT&T on growth areas like 5G, fiber Internet and HBO Max.
“In our view, this is a bad financial transaction, but it could be good for the company strategically,” he wrote.
Oppenheimer‘s
Timothy Horan Friday. “T’s FCF will be pressured after closing the deal and the dividend could be at risk. T loses the cost of being CEO of the new DTV, but more attention can be helped to growing companies.
AT&T also has a $ 27 billion wireless spectrum bill to buy and wipe out newly acquired C-band licenses. Investors and analysts will then listen to the company at an investor day on March 12, when management is expected to talk about the long-term strategy and be able to reveal new financial targets.
Write to [email protected]