AT&T pushed to unload DirecTV as troubles mount, Dish may be best option

As the troubles pile up on AT&T Inc.’s DirecTV subsidiary, Wall Street bankers have been inundating the telecom giant with proposals to sell off the satellite TV operator with Charlie Ergen’s Dish Network as one potential suitor, the Fox Business Network has learned.

The banking ideas being floated come at a precarious time for the nation’s largest satellite TV company, which provides services to around 22.9 million subscribers. Despite its massive reach, DirecTV has been hemorrhaging customers—losing 2.5 million subscribers in the last year alone. The company is the target of activist investor Elliot Management, which has snapped up a $3.2 billion stake in AT&T and called on management to unload DirecTV.

Mounting problems

Meanwhile, AT&T has been sued in federal court over allegedly faking the number of subscribers to its streaming service, DirecTV Now — in an effort to make the brand look like it was gaining customers organically. And maybe more ominous: The Fox Business Network has learned that DirecTV may be the focus of a boycott engineered by outside advisers to President Trump, who has been critical of the news coverage of AT&T subsidiary CNN. Trump has called on his supporters to boycott AT&T services in the past to put pressure on CNN to changes its coverage of the White House, and outside advisers have told the president that DirecTV may be most vulnerable of AT&T’s units to a customer boycott, according to people with knowledge of the matter.

But Wall Street investment bankers are telling AT&T there is a simple solution that would involve a sale of DirecTV or a merger, people familiar with the matter say. Among the deals being pushed is one where DirecTV teams up with Dish Network by spinning off the companies into a separate unit or a merger that could be financed with capital from private equity firms since Dish — with 12 million subscribers — is a significantly smaller company than DirecTV, these people add.

It's unclear how serious Randall Stephenson, AT&T’s CEO, is taking such overtures.

An AT&T spokeswoman declined to comment as did a spokeswoman for Dish. But media analysts believe the two companies would be stronger together since they’d share the hefty cost of their satellite infrastructure.

Such a combination can help merged companies slash costs, increase scale and compete with tech and media giants entering the content and streaming world.

"There has to be an appetite between the two companies to merge,” said veteran telecommunications executive Peter Adderton, founder of prepaid wireless service Boost Mobile, who has also heard of the bankers' overtures. “The biggest concern I would think for Dish and DirecTV is its tremendous infrastructure costs both companies have, clearly there’re new competitors in the video space: YouTube, Disney, Amazon and others that don’t have these legacy infrastructure costs.”

Ticker Security Last Change Change %
T AT&T INC. 17.32 +0.02 +0.11%
DISH n.a. n.a. n.a. n.a.

Shares of Dish, which had been down four percent today, gained two percent on a FOX Business report of a possible merger. Shares of AT&T closed at $37.16.

Big believers of distribution

Stephenson, the AT&T CEO, hasn’t addressed Elliot Management’s call to sell DirecTV, which was announced in a Sept. 9 letter to AT&T’s board that recommended cost-cutting and other divestitures to bolster the company's balance sheet after the $85 billion acquisition of Time Warner. The megamerger closed in June 2018 and survived a challenge by the federal Justice Department’s antitrust division.

However, in a Sept. 9 letter to AT&T’s board, he recommended cost-cutting and other divestitures to bolster its balance sheet after the $85 billion acquisition of Time Warner, which closed in June 2018 and survived a challenge by the federal Justice Department’s antitrust division.

But Wall Street has been somewhat skeptical of the telecom behemoth. The company has mountains of debt and cultural differences between AT&T – a diversified telecom company — and Time Warner’s main business of news and entertainment. Shares have basically traded flat since the deal was announced in the fall of 2016.

Still Stephenson has defended the strategic sense of the deal, and DirecTV’s role in the company. Speaking Tuesday at Goldman Sachs Communacopia Conference, Stephenson said AT&T is “getting an amazing premium for selling that small advertising inventory in DirecTV.” Stephenson also noted DirecTV plays a key role in the distribution of AT&T’s content: “We’ve always been big believers of distribution and the power of it.”

The purchase of DirecTV cost $67 billion, and AT&T took over its debt when it closed the deal in July 2015. But DirecTV lost 2.5 million subscribers in the last 12-month period. The number of subscribers dropped to 22.9 million in the second quarter 2019 from 25.4 million subscribers in the second quarter 2018.

Because of that bankers say if Stephenson were to unload it now, he would be lucky to recoup half of the purchase price.

And the potential sale price of DirecTV could fall further if the Trump boycott effort proves even mildly successful. In June, President Trump suggested a boycott of AT&T on Twitter because of CNN’s coverage of the White House, and more recently advisers have suggested to the president that to extract maximum pressure on the company, he should target the boycott at DirecTV.

A White House spokesman declined comment on the matter, and it’s unclear if the president will focus any possible boycott on the company.

Potential pitfalls

One other devastating blow to DirecTV could come if the NFL decides not to renew its so-called “Sunday Ticket” contract with the satellite television provider  — a package that allows viewers to watch out-of-network games with their DirecTV subscription. Failure to renew could mean DirecTV loses 10 percent of its subscriber base, according to some estimates.

If DirecTV does nab the contract, they would have to foot an annual bill of $1.5 billion for the rights, which is the second-largest amount the NFL charges any network. The only channel to pay more is ABC, which has exclusive rights to Monday Night Football for approximately $2 billion a year.

And there is no guaranteeing that Dish, or any other suitor, will seek to buy an asset that is clearly declining in value. While some bankers are hopeful that a merger with Dish will resolve DirecTV’s problems, Dish may not be in a position to consummate a merger since it’s already embroiled in buying spectrum and prepaid wireless businesses from Sprint Corp. as part of the DOJ’s approval of the T-Mobile-Sprint merger.

Dish is seeking a partner to help build out and finance their current deal with T-Mobile and Sprint to create a fourth major wireless carrier, based on comments Ergen made Tuesday at the Goldman Sachs conference.