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M&A or IPO: Weighing AT&T's options for DIRECTV Latin America

In an indication an outright sale of DIRECTV Latin America may be off the table, AT&T Inc. is quietly exploring an initial public offering of a minority interest in its Latin American entertainment services business.

AT&T said Feb. 7 that it confidentially filed a registration statement with U.S. regulators, a move that allows the company to gauge interest from the investment community before filing publicly. And while the plan may still fall apart, if an IPO does occur, AT&T expects it to take place relatively soon — in the first half of 2018.

The news comes a few months after Reuters reported AT&T was mulling options for its Latin American pay TV operations, including a potential sale. BTIG Research analyst Walter Piecyk noted the $8 billion valuation reported at the time was down from a $10 billion valuation cited in January 2016, though it was unclear which assets were included to calculate the $8 billion figure. AT&T was reportedly hoping to keep its pay TV business holdings in Mexico to complement its wireless services there, whereas the other Latin American pay TV assets were seen as noncore.

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DIRECTV Latin America is composed of three entities: DIRECTV PanAmericana, which provides video services in Argentina, Chile, Colombia, Ecuador, Peru and Venezuela, among certain other countries; SKY Brasil, which is a 93% owned subsidiary; and Sky México, in which DIRECTV Latin America holds a 41% minority stake. Grupo Televisa SAB holds the majority stake in Sky México.

The segment has grown significantly since DIRECTV first entered the Latin American market in 1996, according to Kwame Campos, an analyst with Kagan, a media research group within S&P Global Market Intelligence. Although the service initially positioned itself as a premium product targeted toward the wealthiest population segments, it pivoted in 2008 to target a wider consumer base by offering a prepaid pay TV service that required neither a credit check nor a long-term contract. DIRECTV Latin America became a subsidiary of AT&T in 2015 when the telco giant bought DIRECTV in a transaction valued at $63 billion.

More recently, though, that strategy of targeting lower-income customers has presented some challenges, especially in Brazil, according to Kagan analyst Georgia Jordan.

"The Brazilian market has seen generalized losses in the satellite TV market … as this segment was the one to focus more on lower-income customers since the launch of prepaid offers, and this is the segment most affected by Brazil's economic recession," Jordan said.

DIRECTV Latin America is also facing increased competition on two fronts: first, from operators that are able to provide both TV and internet service as part of a bundled package; and second, from over-the-top services.

"Convergence is slowly rendering satellite television obsolete due to the high cost of bundling broadband with [direct-to-home TV service,]" Campos said.

The analysts noted all of these factors mean AT&T may still be interested in selling all or part of its Latin American pay TV operations, but they also noted a sale would not be easy.

"Specifically in Brazil, there has been frequent chatter about the possibility of telcos acquiring SKY to build up their multiplay bundles, but any acquisition seems unlikely at the moment since … no one really has the cash for such an acquisition," Jordan said.

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Further complicating matters is the regulatory environment, which would prevent most larger operators in Latin America from consolidating further or purchasing DIRECTV Latin America in one fell swoop.

If investors show only lukewarm interest in an IPO, Jordan said one alternative would be to pursue the sale of individual country operations.

"Potential buyers with an interest in expanding their pay TV subscriber base are more likely to be local operators/telcos rather than regional groups," she said.

Despite recent years of economic turbulence in Brazil and competition from new players in various countries, Jordan thinks DIRECTV Latin America still has good growth opportunity overall. The segment ended 2017 with 13.6 million video connections, up from 12.5 million at the end of 2016, though much of that increase was due to a change in methodology for counting prepaid video connections. Revenues from the segment totaled $1.39 billion for the fourth quarter of 2017, up year over year from $1.26 billion.

"Other than Brazil, most markets in Latin America still show potential for multichannel growth," Jordan said. "And since many of these countries have limited fixed networks, satellite services still have good prospects."

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