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AT&T's narrow path to potential DIRECTV sale

Under pressure to reevaluate its strategic priorities, AT&T Inc. would face several challenges should it attempt to sell its DIRECTV unit, analysts said.

AT&T is exploring various options for its satellite TV unit, including a spinoff and a combination of DIRECTV with rival satellite operator DISH Network Corp., sources told The Wall Street Journal. The Sept. 18 Journal report noted that discussions were preliminary and AT&T may ultimately decide to keep DIRECTV. The report followed a Sept. 9 letter by activist shareholder Elliott Management Corp. that urged AT&T to consider several strategic alternatives to improve its business, including the sale of DIRECTV.

AT&T declined to comment on the DIRECTV sale speculation to S&P Global Market Intelligence.

The satellite TV business that AT&T acquired in 2015 has been shedding subscribers in recent quarters. AT&T's "premium TV" subscribers, which includes both U-verse and DIRECTV, fell to 21.6 million at the end of the second quarter, down from 25.3 million at the end of 2016. Subscribers also fell at the company's streaming video service AT&T TV NOW, formerly known as DIRECTV NOW, to 1.3 million in the most recent quarter, which marked the service's third consecutive sequential decline after peaking at 1.9 million subscribers in the third quarter of 2018.

AT&T is facing a shareholder lawsuit claiming that it inflated DIRECTV NOW subscriber figures prior to the June 2018 closing of its Time Warner acquisition. AT&T called the lawsuit baseless and said it intends to fight the allegations in court.

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In recent interviews, debt analysts said a combination of DIRECTV and DISH Network Corp. would likely be the best option for AT&T to divest the business, but a direct sale might be difficult to accomplish, making a spinoff the more likely option.

Given the weak performance of DIRECTV on both its satellite and over-the-top metrics, Moody's analyst Neil Begley said a sale would likely result in a loss for AT&T, which paid about $67.50 billion to acquire the satellite TV company in 2015. AT&T would want to achieve a deal multiple that was higher than its debt interest to make it accretive, which may be impossible, Begley said.

AT&T's debt has risen considerably in recent years as it spent billions to acquire both DIRECTV and later Time Warner in a bid to diversify its media strategy. AT&T's total debt-to-EBITDA ratio climbed from 1.60x in 2013, prior to the DIRECTV acquisition, to 3.5x in the June quarter of 2019, according to data compiled by S&P Global Market Intelligence. The growing debt load has driven three ratings downgrades from Moody's since the 2015 DIRECTV deal closing, Begley said, adding that it also leaves AT&T highly exposed to any market downturn.

The Moody's analyst said while a sale of DIRECTV may be out of reach, AT&T could spin off the business into its own company — along with some of its debt — thus reducing AT&T's total corporate leverage.

"DISH and DIRECTV should be merged. That would probably be the right play given the declines for satellite subscribers," Fitch analyst Patrice Cucinello said in a recent interview. However, regulatory hurdles could hamper a combination of DIRECTV and DISH, she noted.

Aside from DISH, Fitch analyst John Culver said there would be limited buyers for DIRECTV given its declining business, but the company may be able to achieve a spinoff if it were to retain the right financial partners.

Walter Piecyk, an analyst at technology, media and telecommunications-focused research firm LightShed Partners, said a combination of DIRECTV and DISH makes "tons of commercial sense," allowing the companies to save on duplicative back-end and administrative costs, as well as lower content acquisition expenses. If such a deal were to occur, he predicted it would need to take the form of a joint venture, allowing AT&T to avoid headlines about losing money on its DIRECTV acquisition.

AT&T's stock closed Sept. 19 at $37.15, up about 1% for the day following the Journal report on a potential DIRECTV sale. In the days immediately following the Elliott Management shareholder letter release, AT&T's stock shot up 7% before retreating.

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