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A DirecTV technician performs an installation in California.
Patrick T. Fallon / Bloomberg
AT & T’s complex transaction to divest DirecTV and its other pay-TV businesses received generally positive response on Wall Street because of its strategic intent, but not because of its potential financial impact.
Some analysts see the transaction as the first step to 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 earnings in the short term, potentially putting additional pressure on the company’s high dividend.
AT&T shares (ticker: T) fell about 2.2%, at about $ 28, during Friday trading. The S&P 500 index fell 0.2%.
The transaction, announced Thursday night, will see AT&T split its pay-TV operations – including DirecTV, AT&T TV and U-verse – into a separate entity later this year. There are several moving parts.
AT&T will own 70% of the common stock of the new DirecTV, a stake of $ 4.2 billion, plus $ 4.3 billion of junior preferred stock with a return in kind of 6.5%. Private equity firm TPG Capital will pay $ 1.8 billion for senior preferred stock, yielding 10% in cash, and will also receive a 30% share of the entity’s common stock. Finally, the new DirecTV will incur $ 6.2 billion in new debt.
Proceeds from the TPG purchase and debt issuance will go to AT&T, bringing it up to $ 7.6 billion in cash. The company will use that money to reduce its existing debt.
There are a few extra wrinkles: AT&T will be responsible for the first $ 2.5 billion in losses from DirecTV’s NFL Sunday Ticket, the new DirecTV also assumes $ 200 million in existing AT&T debt, and there aren’t any yet disclosed tax implications. But put all that together, AT&T attributes $ 16.3 billion enterprise value to the new DirecTV.
“When it comes to determining the value of the transaction, we admit that we are confused and heard from a large number of investors who are too; we assume that a presentation so confusing is somehow deliberate, ”JP Morgan analyst Phil Cusick wrote on Friday. “Regardless of the stated deal value, we feel it should be enough to say that AT&T will receive ~ $ 7.6 billion in cash upfront, keep 70% of its ordinary assets, and a nice portion of its mid-term cash flow. assuming everything goes well. “
AT&T management said Thursday that they expect to receive approximately $ 1 billion in distributions per year from the new DirecTV from a dividend on its common stock. But that depends on the business results of DirecTV.
With the still somewhat murky details of the spin-off out of the way, analysts turned their attention to the longer-term strategic and financial implications for AT&T. Many saw it as opening the door for a future merger with Dish (DISH) that could help consolidate the US satellite TV industry. AT & T’s 70% stake in the new entity means it can still benefit, but separating the company from the core of AT&T means it may not have as many regulatory issues and distractions in a potential transaction.
Dish chairman Charlie Ergen called a DirecTV-Dish combination “inevitable” last fall. That could follow as early as 2022.
Despite the known pressure to cut cables and a subscriber exodus since AT&T bought DirecTV in 2015 – for about $ 66 billion, including debt – the company has remained profitable in its downturn. The company’s video segment brought in $ 28.6 billion in revenue, down 11%, and nearly $ 4 billion in Ebitda – or earnings before interest, taxes, depreciation and amortization – which was 12% lower than in 2019. That was about 7% of AT & T’s $ 54.5 billion in adjusted Ebitda in 2020, excluding one-time costs, including a $ 15.5 billion write-off of – you guessed it – DirecTV. AT&T lost about 3.3 million video subscribers last year, to finish with just over 17 million.
By turning it down, AT&T is losing DirecTV’s contribution to its earnings and free cash flow, but it also doesn’t feel its earnings decline.
“This performance of structuring significantly improves AT & T’s revenue growth profile (to <1%) and maintains a lot of exposure to the potential synergies of a merger with DISH, at the expense of a higher dividend payout ratio and slightly increased net leverage," wrote analyst Bernstein Peter Supino on Friday morning.
He calculates a dividend payout ratio of nearly 70% for AT&T after the transaction, and a net debt / adjusted Ebitda ratio of up to 3.6 times. AT & T’s dividend currently yields 7.3% on an annual basis.
AT&T also loses Bill Morrow to the new DirecTV entity, where he becomes CEO. Morrow is a veteran telecom manager who has been responsible for expense management at AT&T since 2019 and has earned a reputation as a “ lead expense account ” – although AT&T CEO John Stankey reversed that characterization in a conversation with investors Thursday night. Stankey highlighted the spin-off’s ability to focus AT&T on growth areas such as 5G, fiber-optic internet and HBO Max.
“This is a bad financial transaction in our opinion, but it could be strategically good for the business,” he wrote
Oppenheimer‘s
Timothy Horan on Friday. T’s FCF will come under pressure after the deal is closed and the dividend could be in jeopardy. T will lose its cost of becoming CEO of the new DTV, but more focus on growth companies could help. “
AT&T also has a $ 27 billion wireless spectrum bill in the pipeline to purchase and settle newly acquired C-Band licenses. Investors and analysts will then hear from the company on an investor day on March 12, when management is expected to discuss its long-term strategy and reveal new financial targets.
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