(Bloomberg) – AT&T Inc. and activist investor Elliott Management Corp. seems to agree on one thing: DirecTV, the phone giant's shrinking satellite service, is a drag on the company. But solving the problem will not be easy.
Stephenson met with Elliott Management officials on Tuesday, according to a person familiar with the matter. In a letter to AT&T last week, Elliott said it had bought $ 3.2 billion in the telephone company, highlighted areas of improvement and raised the opportunity to dispose of DirecTV.
Here are some of the options AT&T has for DirecTV, along with advantages and disadvantages.
AT&T and Dish Network Corp. – the other major satellite TV provider – is suffering from the grossest subscriber losses in the pay-TV industry. And in June, they said they are open to a combination.
But the creation of pay-TV colossuses with nearly 30 million subscribers will almost certainly meet regulatory resistance, even today when viewers have so many new options available, such as Netflix and new media giants streaming services including Walt Disney Co. and Comcast Corp.
"It has been tried from a regulatory perspective," said Stephens on September 11. "It has not been successful, and I do not know that there is any change in the regulatory perspective."
The relationship of connecting two sinking businesses still has fans.
"It's complicated, but not impossible," said Jonathan Chaplin, a New Street Research analyst. "Under the right conditions, it can get funding."
There will be benefits to combining the business: With scale comes negotiation handles, lower content costs and potentially lower overhead. Cash generation is attractive. And add a dynamic leadership team, and it can be run successfully, Chaplin said.
But there are also concerns: Depending on how a deal is structured, AT&T may lose a key distribution arm for its new media strategy and suffer a crippling loss of cash flow. DirecTV has $ 25.5 billion in annual revenue and generates about $ 4.5 billion in free cash flow, according to estimates by Walt Piecyk, an analyst at LightShed Partners LLC.
“Markets always thought they bought this declining asset with steady cash flow as a stop. -gap measures to strengthen their balance sheet and credit values, ”said Todd Lowenstein, CEO of Highmark Capital Management Inc.
Spinoff or Sale
equity investors or a spinoff to shareholders.
The proceeds from a sale can help AT&T reduce some of its total debt of $ 194.5 billion. That would give the biggest boost to the credit rating, according to a report Friday from Neil Begley, a Moody's Corp. analyst.
Similarly, AT&T was able to distribute shares in DirecTV to its current shareholders through an exchange offer. That would reduce AT & T's outstanding shares and trim the dividend load, Begley wrote.
As part of such a transaction, DirecTV could also take on debt and pay AT&T dividends to reduce its own borrowing and compensate for the loss of cash flow. Such a scheme is "probably one of the more creditworthy after a direct sale," Begley said.
With an agreement, AT&T will potentially lose a customer base for its advertising and media products. And even released for DirecTV, the company will still have a lot on the plate. AT&T faces a huge expense burden for 5G network expansion, dividends and further debt reduction. The company's newly acquired WarnerMedia division increases production of movies and TV series to support its new streaming efforts.
"A sale or spin can give some strategic and financial meaning given the changing competitive landscape, but they still need to be laser-focused on execution to succeed," Lowenstein said.
Dallas-based AT&T knew it was buying a mature satellite TV business with a limited shelf life when it bought DirecTV. Stephenson's plan, given enough time, was to gradually serve customers through broadband connections, as it now tries to do with the new AT&T TV offering, a cheaper cable-like service.
These customers, along with the 77 million regular monthly wireless subscribers, will provide a great starting point for selling advertising and additional services, such as the upcoming HBO Max video streaming service.
It is crucial to make progress on these fronts. On the left, AT & T's TV business may see a steep decline in pay-TV subscribers. Faster revenue losses will make it harder to meet other cash needs.
"If AT&T does not find an attractive exit from DirecTV, they will continue to squeeze as much free cash flow as they can from the television business," said Piecyk. "If they can leverage network improvements, push back on content pricing and slow down subscriber losses, it would certainly advance their strategy."
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