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A DirecTV technician is performing an installation in California.
Patrick T. Fallon / Bloomberg
AT & T’s complex transaction of eliminating DirecTV and other pay-TV companies has generally received positive reactions on Wall Street for its strategic intent, but not for its potential financial impact.
Some analysts see the transaction as a first step towards a second deal – probably a merger with the satellite competitor
Dish Network.
The downside is that it will have an influence on AT&T’s cash flows and short-term earnings, possibly accumulating additional pressure on the company’s higher dividend.
AT&T (ticker: T) shares fell about 2.2% on Friday’s trading to about $ 28. The S&P 500 index fell 0.2%.
The deal, announced on Thursday night, will see AT&T give up its pay-TV operations – which include DirecTV, AT&T TV and U-verse – in a separate entity later this year. There are several moving parts.
AT&T will own 70% of the new capital of the new DirecTV, a stake valued at $ 4.2 billion, plus will receive $ 4.3 billion in junior preferred shares, with a payment in kind of 6.5%. Private equity firm TPG Capital is paying $ 1.8 billion for senior preferred capital with a 10% cash return and will also acquire a 30% stake in the entity’s common shares. Eventually, the new DirecTV will take on new $ 6.2 billion in debt.
Proceeds from the acquisition of TPG and the issuance of debt will go to AT&T, providing it with $ 7.6 billion in cash in advance. The company will use this money to reduce its existing debt.
There are a few additional wrinkles: AT&T will be responsible for the first $ 2.5 billion loss in DirecTV’s Sunday NFL ticket, the new DirecTV also assumes $ 200 million in existing AT&T debt, and there are tax implications that to be disclosed. But put it all together and AT&T assigns a new $ 16.3 billion value to the new DirecTV.
“Regarding the value of the transaction, we recognize that we are confused and heard from a large number of investors who are the same; we assume that such a confusing presentation is in some way intentional, ”JP Morgan analyst Phil Cusick wrote on Friday. “Regardless of the declared value of the transaction, we believe it should be sufficient to say that AT&T receives approximately $ 7.6 billion in cash, retains 70% of the common capital and obtains a large part of the cash flow in the medium term, assuming everything goes well. “
AT&T’s management said on Thursday that it expects to receive distributions of about $ 1 billion a year from the new DirecTV from a dividend on ordinary shares. But that will depend on the operational results of DirecTV.
With the still somewhat unclear details of the spinoff, analysts focused on the long-term strategic and financial implications of the transaction for AT&T. Several have seen it open the door to a future merger with Dish (DISH) that could help strengthen the US satellite TV industry. AT & T’s 70% stake in the new entity means it could continue to benefit, but separating the business from the core AT&T means it may not face a regulatory headache and distraction in a potential transaction.
Dish President Charlie Ergen called a DirecTV-Dish combination “inevitable” last fall. This could follow immediately after 2022.
Despite well-known cable-cutting pressures and an exodus of subscribers since AT&T acquired DirecTV in 2015 – for about $ 66 billion, including debt – the business has remained profitable in decline. The company’s video segment brought in revenue of $ 28.6 billion, down 11% and nearly $ 4 billion in Ebitda – or earnings before interest, taxes, depreciation and amortization – which fell 12% from 2019 It accounted for about 7% of AT&T’s $ 54.5 billion in adjusted EBITDA in 2020, which excludes some one-off costs, including a $ 15.5 billion reduction in – you guessed it – DirecTV. AT&T lost about 3.3 million video subscribers last year, to just over 17 million.
By lowering it, AT&T will lose DirecTV’s contribution to its earnings and free cash flow, but it will also not feel its revenue decline.
“This structuring significantly improves AT&T’s revenue growth profile (to <1%) and retains much exposure to the potential synergies of a merger with DISH, at the cost of a higher dividend payout ratio and a slight net leverage. "Bernstein analyst Peter Supino wrote on Friday morning.
It calculates a dividend payment ratio of almost 70% for AT&T after the transaction and an adjusted net debt / Ebitda ratio of up to 3.6 times. Currently, AT & T’s dividend produces 7.3% annually.
AT&T also loses Bill Morrow in the new DirecTV entity, where he will become CEO. Morrow is a longtime telecommunications executive who has been managing AT&T’s expense management since 2019 and has earned a reputation as a “cost-cutter in chief” – although AT&T CEO John Stankey pushed this characterization back into a investor call on Thursday night. Stankey highlighted the spinoff’s ability to focus on AT&T in growth areas such as 5G, fiber internet and HBO Max.
“This is a bad financial transaction in our opinion, but it could be good for the company strategically,” he wrote.
OppenheimerS
Timothy Horan Friday. “T’s FCF will be pressed after the transaction is completed and the dividend could be in jeopardy. T loses his spending to become the CEO of the new DTV, but a greater focus on growing business could help. ”
AT&T also has a $ 27 billion wireless spectrum bill for the purchase and cancellation of newly acquired C-Band licenses. Investors and analysts will learn from the company on Investors Day on March 12, when management is expected to talk about the long-term strategy and could reveal new financial targets.
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