AT&T’s complex transaction to shed DirecTV and its different pay-TV companies encountered usually constructive reactions on Wall Street for its strategic intent, but not for its potential monetary impression.
Some analysts see the transaction as step one towards a second deal—presumably a merger with satellite competitor
The adverse facet is that it’ll weigh on AT&T’s money flows and earnings within the near-term, probably heaping extra strain on the corporate’s lofty dividend.
AT&T inventory (ticker: T) was down about 2.2% in Friday buying and selling, at about $28. The S&P 500 index fell 0.2%.
The transaction, announced Thursday evening, will see AT&T spin off its pay-TV operations—which embody DirecTV, AT&T TV, and U-verse—right into a separate entity later this 12 months. There are a number of shifting elements.
AT&T will maintain 70% of the widespread fairness of the brand new DirecTV, a stake valued at $4.2 billion, plus get $4.3 billion in junior most well-liked shares with a 6.5% payment-in-kind yield. The private-equity agency TPG Capital is paying $1.8 billion for senior most well-liked fairness yielding 10% in money, and likewise will get a 30% share of the entity’s widespread inventory. Finally, the brand new DirecTV will tackle $6.2 billion in new debt.
Proceeds from the TPG buy and debt issuance will go to AT&T, offering it with $7.6 billion in money up entrance. The firm will use that cash to scale back its present debt.
There are just a few extra wrinkles: AT&T shall be accountable for the primary $2.5 billion in losses from DirecTV’s NFL Sunday Ticket, the brand new DirecTV additionally assumes $200 million of present AT&T debt, and there are to-be-disclosed tax implications. But put all that collectively and AT&T assigns an enterprise worth of $16.3 billion to new DirecTV.
“As to getting to the value of the transaction, we admit to being confused and heard from a large number of investors who are as well; we assume that a presentation this confusing is in some way on purpose,” wrote J.P. Morgan analyst Phil Cusick on Friday. “Regardless of the stated value of the deal, we believe it should suffice to say that AT&T is getting ~$7.6b of cash up front, keeping 70% of the common equity, and getting a nice share of medium-term cash flow assuming everything goes well.”
AT&T administration mentioned on Thursday they anticipate to get roughly $1 billion in distributions a 12 months from the brand new DirecTV from a dividend on the widespread shares. But that can rely upon DirecTV’s working outcomes.
With the nonetheless considerably murky particulars of the spinoff out of the way in which, analysts turned their focus to the deal’s strategic and longer-term financial implications for AT&T. Several noticed it as opening the door to a future merger with Dish (DISH) that might assist to consolidate the U.S. satellite-TV trade. AT&T’s 70% curiosity within the new entity means it may nonetheless profit, but separating the enterprise from core AT&T means it won’t face as a lot of a regulatory headache and distraction in a possible transaction.
referred to as a DirecTV-Dish combination “inevitable” final fall. That may observe as quickly as 2022.
Despite the well-known cord-cutting pressures and an exodus of subscribers since AT&T bought DirecTV in 2015—for about $66 billion, together with debt—the enterprise has remained worthwhile in its decline. The firm’s video section introduced in $28.6 billion in income, down 11%, and virtually $4 billion in Ebitda—or earnings earlier than curiosity, taxes, depreciation, and amortization—which was down 12% from 2019. That was about 7% of AT&T’s $54.5 billion in adjusted Ebitda in 2020, which excludes some one-time prices together with a $15.5 billion write-down of—you guessed it—DirecTV. AT&T misplaced roughly 3.3 million video subscribers final 12 months, to finish with simply over 17 million.
By spinning it off, AT&T loses DirecTV’s contribution to its earnings and free money stream, but additionally gained’t really feel its income declines.
“This feat of structuring materially improves AT&T’s revenue growth profile (to <1%) and retains plenty of exposure to the potential synergies of a merger with DISH, at the cost of a higher dividend payout ratio and slightly increased net leverage,” wrote Bernstein analyst Peter Supino on Friday morning.
He calculates a dividend payout ratio of near 70% for AT&T after the transaction, and a net-debt-to-adjusted-Ebitda ratio of as much as 3.6 occasions. AT&T’s dividend at the moment yields 7.3% yearly.
AT&T additionally loses Bill Morrow to the brand new DirecTV entity, the place he’ll turn out to be CEO. Morrow is a longtime telecom government who had been in control of expense administration at AT&T since 2019, and earned a popularity as “cost-cutter in chief”—though AT&T CEO
pushed again on that characterization on an investor name Thursday night. Stankey emphasised the spinoff’s capacity to focus AT&T on development areas like 5G, fiber web, and HBO Max.
“This is a bad financial transaction, in our view, but it could be good for the company strategically,” wrote
Timothy Horan on Friday. “T’s FCF will be pressured after the deal closes and the dividend could be at risk. T is losing its expense czar to be CEO of the new DTV, but more focus on growth businesses could help.”
AT&T additionally has a $27 billion wireless spectrum bill coming up to buy and clear newly acquired C-Band licenses. Investors and analysts will subsequent hear from the corporate at an investor day on March 12, when administration is predicted to talk about long-term technique and will unveil new monetary targets.
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