AT&T Could Take A ~$7.5 Billion Haircut If It Divests DirecTV

by Trefis Team
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The Wall Street Journal reported that AT&T (NYSE:T) might be considering selling its under-performing DirecTV satellite TV operations, partly due to pressure from activist hedge fund Elliott Management which wants the company to streamline its business. The company is contemplating multiple options, that include spinning off DirecTV into a separate public company, or selling it to rival Dish Network. While AT&T acquired DirecTV at an enterprise value of $67 billion (DirecTV U.S. and Latin American operations), we believe that it could be worth much less at the moment. In this analysis, we break down the potential value of the U.S. operations, which we believe would be the target of the divestment, considering that the Latin American operations (now called Vrio) have actually grown in recent years. We also compare the key metrics and valuation with DirecTV’s metrics as a standalone company in 2014, the year prior to its merger with AT&T.

View our interactive dashboard analysis Why AT&T Would Have To Divest DirecTV At A Discount

DirecTV’s Subscriber Base Has Declined From 20.4 Million In 2014 To 19.2 Million In 2018, And Further Declines Are Expected This Year

  • DirecTV’s satellite subscriber base in the U.S. has declined from 20.4 million in 2014 to 19.2 million in 2018.
  • The company’s over-the-top offering – DirecTV Now – has grown from 0.3 million subscribers in 2015 to 1.6 million in 2018.

We Estimate That EBITDA For DirecTV U.S. Will Decline From ~$7 Billion In 2014 To $6.3 Billion In 2019

  • DirectTV’s U.S. revenues stood at $26.2 billion in 2014, with its company-wide EBITDA margin standing at 26%, implying an EBITDA of about $7 billion from the U.S.
  • DirecTV revenues this year stood at $27.5 billion per our estimates, including the DirecTV Now streaming service launched in 2016. We estimate that margins have declined to 23%, translating into an EBITDA of about $6.3 billion.
  • We estimate the company’s DirecTV revenues using DTV subscriber mix of 85% of total video subscribers and estimated total video revenues of about $32.3 billion.
  • We estimate 2019 margins for DirecTV U.S. as 23%, considering that the Entertainment segment – which includes the DirecTV operations – had an EBITDA margin of about 21% in 2018.

DirecTV U.S. Could Have An EV Of $45 Billion, Implying A Haircut Of About 15%

  • AT&T acquired DirecTV at an EV/EBITDA multiple of about 7.7x in 2015 and we estimate that this would have valued the U.S. operations at about $53 billion (the total EV for the deal was $67 billion)
  • However, we believe that valuation multiple is likely to have declined since then, as the Pay TV market has declined, with DirecTV underperforming its key rivals.
  • DirecTV Lost ~9% of its subscribers over the last 2 years; other major players lost between 2% to 4% of subscribers.
  • Considering this, we use an EV/EBITDA multiple of about 7.2x, valuing the DirecTV operations at $45.5 billion.
  • This would mark a decline of about 15% below the purchase price in 2015.

Conclusion

  • Overall, we think it’s safe to assume that AT&T will have to take a haircut if it were to sell the DirecTV operations outright.
  • That said, the company’s options remain unclear as a merger with Dish is likely to face significant regulatory hurdles, while the spin-off could potentially be complex.
  • Moreover, despite the declines, the DirecTV operations are likely to remain a significant source of cash for AT&T, supporting its dividend and debt repayments.

 

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