For DirecTV and Dish, It May Be Now or Never
(Bloomberg Opinion) -- If AT&T Inc. didn’t already have reason enough to consider parting ways with its shrinking DirecTV unit, there may be new inspiration for doing so: a cast of regulators potentially more amenable to Dish Network Corp. buying the rival satellite-TV business.
It was a year ago this week that the U.S. Justice Department lost its case in trying to block AT&T’s own $102 billion acquisition of Time Warner, a monumental courtroom decision that seemed to herald a new “anything goes” dealmaking environment. But the real test may now be the pending merger between T-Mobile US Inc. and Sprint Corp., because if allowed, antitrust regulators would be setting a precedent that it’s OK for two direct competitors in a highly concentrated market to join forces. That would be even more consequential for Corporate America’s M&A ambitions than the Time Warner ruling.
It would certainly ease the path for a merger of Dish and AT&T’s DirecTV, an idea that both companies are open to exploring, people familiar with their thinking recently told Bloomberg News. And while they’re not holding active deal negotiations right now, their window of opportunity may not stay open very long should Democrats win back the White House in 2020. It may be now or never.
DirecTV, which was acquired by AT&T in 2015, has never been able to thrive within the conglomerate, and it’s clear that AT&T well overpaid for the purchase. I wrote in January that if DirecTV continues to weigh on the company’s results and its perception in the stock and bond markets, AT&T should just divest it. And Dish, controlled by Chairman Charlie Ergen, is the most logical – if not only – prospective suitor out there.
DirecTV lost 1.24 million subscribers last year, as the service stopped promotional pricing and customers switched to cheaper online video-streaming services. The pace of cancellations accelerated in the first quarter of 2019, with its own DirecTV Now streaming service also bleeding subscribers as the business prioritizes expanding profit margins over retaining customers. It’s a similar trend at Dish’s satellite-TV operations, and growth has slowed for Dish’s Sling TV streaming product.
Lately, it’s become even more obvious that DirecTV is an awkward fit within AT&T, as the parent company has shifted its focus to the sexier Time Warner media assets – HBO, Warner Bros. and the Turner TV networks – that have since been named the WarnerMedia division. That business is the epicenter of AT&T’s new video-streaming strategy, with its own Netflix-like app anchored by HBO content coming early next year, even though DirecTV has traditionally housed any pay-TV operations. Whenever AT&T executives are asked why it will make sense to offer DirecTV Now alongside its soon-to-come Netflix-like WarnerMedia app, they struggle to give a coherent answer, usually drawing lines between price and content that may just wind up confusing and deterring customers.
Letting go of DirecTV would help AT&T raise money to more easily pay down the monstrous amount of debt it took on to buy Time Warner last year. AT&T’s net debt was $187 billion as of March, and analysts predict the company will generate just over $60 billion of Ebitda this year. That’s a long way from the net leverage ratio of about 2.5 that it had before the acquisition.
Owning the less attractive satellite-TV business also drags down AT&T’s valuation. Its enterprise value is about 7 times forward Ebitda, less than half Walt Disney Co.’s multiple. Even Dish’s is higher, at about 14, because it’s sitting on billions of dollars of valuable wireless spectrum licenses. One can even envision a deal structured so that AT&T sells DirecTV to Dish and in turn gains some of Dish’s spectrum, which would help the company’s wireless business in building a faster 5G data network. (Ergen’s own plans for the spectrum aren’t entirely clear, though Dish says that it, too, is building a network to enable what’s known as “the internet of things.”)
For Dish, removing a large competitor would have its advantages. When the HBO network went dark on Dish customers last year because of an ongoing programming dispute, DirecTV may have presented the only viable alternative for those in more rural areas without fast enough internet to stream the HBO app online. Should Dish and DirecTV try to merge, regulators may be concerned about the near-term effects on such rural customers.
A merger would bring substantial cost synergies, driving cash flow and helping Dish to lucratively manage the decline of satellite TV. John Hodulik, a UBS Securities analyst, speculated on a Dish-DirecTV merger last week, noting that “a decade from now, in areas that have broadband connections, having to get a satellite to watch TV will seem crazy.” A decade is being generous, in my opinion.
It may be time for AT&T to let its DirecTV headaches become someone else’s problem. Dish may be happy to oblige.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
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