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A DirecTV technician performs an installation in California.
Patrick T. Fallon / Bloomberg
AT & T’s complex deal to overthrow DirecTV and its other pay-TV companies has generally garnered positive reactions on Wall Street because of its strategic intent, but not because of its potential financial impact.
Some analysts see the deal as a first step towards a second deal – presumably a merger with satellite competitor
Rainfall work.
The downside is that it will outweigh AT & T’s cash flow and earnings in the short term, potentially increasing the pressure on the company’s high dividend.
The AT&T share (ticker: T) fell by about 2.2% in Friday trading, at about $ 28. The S&P 500 index fell by 0.2%.
The deal, announced Thursday night, will lead to AT&T expanding its pay-TV operations – which include DirecTV, AT&T TV and U-verse – into a separate entity later this year. There are different moving parts.
AT&T holds 70% of the ordinary shares of the new DirecTV, a stake of $ 4.2 billion, and receives $ 4.3 billion in junior preference shares with a return of 6.5%. The private equity firm TPG Capital pays $ 1.8 billion for senior preference shares that yield 10% cash, and will also receive a 30% stake in the company’s ordinary shares. Eventually, the new DirecTV will incur $ 6.2 billion in new debt.
Proceeds from the TPG acquisition and the issuance of debt will go to AT&T, which has $ 7.6 billion in cash. The company will use that money to reduce its existing debt.
There are some additional wrinkles: AT&T is responsible for the first $ 2.5 billion losses of DirecTV’s NFL Sunday Ticket, the new DirecTV also accepts $ 200 million of existing AT&T debt, and there are tax implications that remain to be announced. But put it all together and AT&T assigns a $ 16.3 billion business value to new DirecTV.
‘As for the value of the transaction, we acknowledge that we are confused and also heard from a large number of investors; we assume that a submission that is confusing is somehow intentional, ‘JP Morgan analyst Phil Cusick wrote on Friday. “Regardless of the stated value of the transaction, we believe that it should be sufficient to say that AT&T receives $ 7.6 billion in cash in advance, retains 70% of the ordinary shares and receives a fair share of the medium-term cash flow, if we everything is going well. “
The AT&T management said on Thursday that they expect to earn approximately $ 1 billion annually in the new DirecTV distributions from a dividend on ordinary shares. But it depends on the operating results of DirecTV.
With the still somewhat obscure details of the impact, analysts have focused their attention on the strategic and long-term financial implications of the deal for AT&T. Several people see this as the opening of a future merger with Dish (DISH) that could help consolidate the U.S. satellite TV industry. AT & T’s 70% stake in the new entity means it can still benefit, but separating the business from AT & T’s core means it may not experience as much legal pain and distraction in a potential deal.
The chairman of the court, Charlie Ergen, called a combination of DirecTV-Dish ‘inevitable’ last year. This could follow in 2022.
Despite the well-known cut-off pressure and the exodus of subscribers since AT&T bought DirecTV in 2015 – for about $ 66 billion, including debt -, the business has remained profitable in its downturn. The company’s video segment generated $ 28.6 billion in revenue, with 11% and nearly $ 4 billion in Ebitda – or earnings before interest, tax, depreciation and amortization – which was 12% lower than in 2019. That was about 7 % of AT & T’s $ 54.5 billion in custom Ebitda in 2020, which includes one-time costs, including a $ 15.5 billion write-off of DirecTV. AT&T lost about 3.3 million video subscribers last year, finishing with just over 17 million.
By eliminating this, AT&T loses the contribution of DirecTV to its earnings and free cash flow, but also does not feel that its revenue is declining.
“This structure improves AT & T’s revenue growth profile (up to <1%) and retains much exposure to the potential synergies of a merger with DISH, at the expense of a higher dividend payout ratio and slightly increased net leverage," Bernstein wrote. . analyst Peter Supino Friday morning.
It calculates a dividend payout ratio of almost 70% for AT&T after the transaction, and a net debt-to-adjusted Ebitda ratio of up to 3.6 times. AT & T’s dividend currently yields 7.3% annually.
AT&T also loses Bill Morrow to the new DirecTV entity, where he will become CEO. Morrow is a longtime telecommunications manager who has been in charge of spending management at AT&T since 2019 and has earned a reputation as a “savings chief”, although AT&T CEO John Stankey pushed back the characterization on an investor call on Thursday night. Stankey emphasized the ability to focus AT & T on growth areas such as 5G, fiber-optic and HBO Max.
“We think this is a bad financial deal, but it could be good for the company strategically,” he wrote.
Oppenheimersay
Timothy Horan Friday. “The FCF of T will be under pressure after the transaction is concluded and the dividend may be in jeopardy. T loses his cost tsar as CEO of the new DTV, but more focus on growth businesses could help. ”
AT&T also has a $ 27 billion wireless spectrum account available to purchase and clean newly acquired C-Band licenses. Investors and analysts will next hear from the company at an investor day on March 12, when management is expected to talk about long-term strategy and unveil new financial targets.
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