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Selling DIRECTV may prove crucial to AT&T's 5G strategy

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Selling DIRECTV may prove crucial to AT&T's 5G strategy

AT&T Inc. has sold more than $10 billion in assets over the past two years, but analysts say more cash is needed to fund the company's 5G ambitions.

AT&T's recently announced deal to sell its anime streaming platform Crunchyroll Inc. for $1.18 billion is just the latest 10-figure deal for the telecom and media conglomerate, which has been unloading noncore assets to pay down debt. But analysts believe a much larger divestiture — the sale of DIRECTV — may be necessary for the company to remain competitive in building out its next-generation 5G network. They believe AT&T needs the cash from a DIRECTV sale to pay for critical mid-band spectrum.

"AT&T needs to sell DIRECTV or risk being marginalized in the 5G era," Jonathan Chaplin, who leads the U.S. communications services research team at New Street Research, said in a recent webinar presentation.

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Chaplin believes AT&T needs the cash from a DIRECTV sale to fund its participation in the Federal Communication Commission's current mid-band spectrum auction. The FCC is auctioning 280 MHz of spectrum in the 3.7 GHz-3.98 GHz band, a portion of the C-band. This mid-band spectrum is seen as crucial for 5G since high-band spectrum cannot travel long distances or penetrate certain surfaces and low-band spectrum has become crowded due to 4G wireless services.

"3GHz will be the workhorse for 5G networks; these bands will carry the bulk of mobile data within the next few years," Chaplin wrote in a research note, adding that the 3 GHz auctions "could have a bigger impact on the industry than any auction since the PCS auctions of the 1990s, which gave birth to T-Mobile [US Inc.] and Sprint."

Mark Lowenstein, managing director of Mobile Ecosystem, an advisory services firm focused on mobile and digital media, similarly believes that C-band spectrum will be critical for AT&T's future, especially given that the company sat out the previous mid-band spectrum auction earlier this year.

"This will be the largest auction in U.S. wireless history ... We expect all the major players to be there. Wall Street analysts expect this auction could raise $50 billion or more," Lowenstein wrote in a research post.

Lowenstein said AT&T will need to "spend big," and it is no coincidence that the timing of the C-band auction coincides with reports that AT&T is looking to sell DIRECTV and its advanced ad sales unit, Xandr.

Citing sources with knowledge of the details, The Wall Street Journal reported this month that AT&T fielded offers for DIRECTV that value the satellite TV business at more than $15 billion, including debt.

Chaplin estimates that if AT&T sold DIRECTV for $16 billion, the company could put $7 billion toward debt reduction, leaving $9 billion for spectrum. Combined with AT&T's $8.7 billion of cash on hand, including the proceeds of the Crunchyroll sale, that would give AT&T nearly $18 billion to spend on spectrum.

CFRA Research analyst Keith Snyder said he does not necessarily think AT&T needs to sell DIRECTV for the auction, but he thinks selling the satellite TV business makes strategic sense regardless.

"I think they want to off-load what has really become a noncore asset, and obviously the money helps pay off debt, and then on top of that they can get rid of a business that has been on a decline for the past two years," he said.

AT&T paid $49 billion for DIRECTV when it bought the company in 2015. But in the years since, the satellite business has dwindled. AT&T's video subscribers — including its U-verse, DIRECTV and over-the-top video customers — fell to 17.8 million at the end of the September quarter, down from 25.2 million in September 2018. That equates to a loss of almost 7.4 million subscribers over the course of two years.

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But Snyder does believe AT&T needs to "spend somewhere between $15 billion and $20 billion on spectrum in this auction to compete effectively."

"This is easily the most valuable spectrum being auctioned off in terms of 5G usage," he said, calling the C-band auction the "granddaddy of spectrum auctions in terms of 5G."

If AT&T does not sell DIRECTV or another significant asset, its options for raising cash to pay for spectrum are somewhat limited given its stretched balance sheet. AT&T ended the September quarter with total debt of $180.93 billion and a total debt/EBITDA ratio of 3.1x.

Chaplin said that if AT&T does not sell DIRECTV, the company may need to consider selling equity.

"AT&T's cost of equity is high, given the 6.9% dividend yield; however, the cost of missing out on 3GHz spectrum is higher," he said.