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With chatter about a potential AT&T sale of pay TV unit DirecTV having returned in recent days, Wall Street analysts are revisiting the potential deal – with different conclusions.
“The idea has been floated repeatedly over the past year or so,” MoffettNathanson analyst Craig Moffett wrote in a Monday note to investors. “Speculation from a year ago even featured the same potential buyers, most notably Apollo,” a private equity firm that the Wall Street Journal mentioned in a Friday report. “To be sure, no one could argue that AT&T wouldn’t be better off without the albatross that is DirecTV. But we’ve been skeptics about the feasibility of a deal … and we still are.”
AT&T, at times under pressure from activist shareholders, has previously considered a DirecTV spin-off or merger with rival Dish Network, which observers have traditionally said could face antitrust concerns, even though Dish chairman Charlie Ergen has said a combination may be “inevitable” amid competition. A sale to private equity groups could avoid regulatory concerns though. The Journal report noted that AT&T is this time looking to sell just more than 50 percent of DirecTV, which would allow it to still leverage its distribution reach.
Moffett sees agreement on a price tag as the key challenge though. “The problem is valuation,” he wrote. “DirecTV’s subscriber base is declining at the astounding rate of 18 percent year-over-year. And earnings before interest, taxes, depreciation and amortization (EBITDA) is, similarly, falling in the high teens as of last quarter. … Even merged with Dish, pro forma subscriber losses for the two combined would be running at 15 percent per year.”
The analyst concluded that “it’s all but impossible to lever a business shrinking that quickly,” while an exit from the investment via an IPO or sale to someone else down the road can’t be ensured. “The only way for a potential buyer to meet a reasonable return hurdle in that scenario would be to get in at a very low entry multiple,” argued Moffett. “That leaves a rather small needle for AT&T to thread. After operating leases, pension obligations, and post-retirement health benefits, AT&T is levered at close to 3.5 times EBITDA, a leverage ratio that is already well out of range for an investment grade issuer with falling revenue and EBITDA. Any DirecTV sale at a multiple lower than their leverage ratio would make their leverage ratio worse, not better. That’s simply not an option.”
So would any buyer be willing to pay more than 3.5 times EBITDA for DirecTV? “We doubt it,” concluded Moffett.
Bernstein analyst Peter Supino, meanwhile, argued in a Tuesday report that a DirecTV sale “would improve AT&T’s growth while straining its dividend payout ratio.”
The title of his report was “Could AT&T sell DirecTV without Dish synergies in the plan?,” highlighting that renewed chatter focused on private equity suitors without any Dish involvement. “Without a synergy enhanced bid, we believe a potential sale of DirecTV will dilute AT&T’s dividend/free cash flow ratio from about 60 percent to about 68 percent. However, shedding DirecTV could enhance AT&T’s revenue growth rate by more than 1 percent, making a higher payout ratio more tenable.”
Supino also said that “we see AT&T continuing to face compromises between de-levering and re-investment in saturated, market share-losing businesses.” And he warned: “Weakening competitive positions across reporting segments and pandemic-related dislocations strain the company’s financial position, preventing needed investments.”
Hal Vogel, CEO of Vogel Capital Management and a former Wall Street analyst, tells THR that the renewed deal talks may concern investors for one reason though. “It shows how clueless management was in 2015 when they bought it at the start of cord cutting and start of streaming,” he says.
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