AT&T Reportedly Weighing Options to Divest DirecTV Business
According to industry grapevines, AT&T Inc. T is reportedly contemplating the divestment of about half of its ownership stake in the DirecTV satellite-television business. The strategic move is likely to help the carrier offload a struggling business that has been a drag on operations and focus more on its core businesses. However, no official statement has yet been made by any of the firms involved in the negotiation process.
AT&T acquired DirecTV in 2015 for a total consideration of $67.1 billion (including assumed debt) to extend its footprint beyond the realms of the wireless business into the pay-television industry. However, the business did not live up to its expectations and began to lose subscribers with the emergence of online streaming services of avant-garde media firms like Netflix, Inc. NFLX, The Walt Disney Company DIS, Hulu and Amazon.com Inc. AMZN.
To add to the woes, AT&T amassed a huge debt burden with the acquisition of Time Warner assets for $85 billion. The company is continuously embarking on a slew of corporate initiatives to reduce its staggering debt pile and de-risk its capital structure to better navigate through the coronavirus-induced global turmoil. Notably, AT&T has decided to cancel its stock buyback program due to the severity of the coronavirus outbreak. The company has also refinanced or repaid debt through make-whole redemptions, tender offers or repayment of scheduled maturities. AT&T is even mulling to divest its gaming business to improve its liquidity position.
Markedly, in May, AT&T has shuttered its DirecTV operations in Venezuela due to the fallout of a geopolitical tussle between the United States and the Latin American country. AT&T faced intense pressure from broadcast regulators in Venezuela to remove channels like CNN en Espanol that aired anti-government protests and critical coverage of its political turmoil. At the same time, it was also criticized by the local opposition parties for airing state-run TV channels as government-sponsored propaganda. This made it extremely difficult for AT&T to abide by the legal requirements of both countries, forcing it to wind up its operations in Venezuela.
The company is presently aiming to divest half of its global operations of DirecTV and retain its distribution network to mint money from it. Various private equity investors have reportedly expressed their interests for the proposed sale according to unnamed sources privy to the matter. But nothing has been made official about the purported discussions.
AT&T is evolving its distribution channels for changing customer demands and emphasizing on self-installation and software-based platforms to redefine its business plans for the virus outbreak. While optimizing operations, it is aiming to increase efficiencies to lower costs while supporting employees and customers with various financial packages. It has a dividend payout rate of 58.9%. The rate has remained relatively steady over the past few quarters, indicating that the company is sharing its earnings with stockholders. It remains to be seen how AT&T aims to reduce the huge debt burden in the coming days and whether it faces any liquidity crisis due to disruptions caused by the COVID-19 pandemic.
Moving forward, AT&T is committed to its three-year financial framework, which is expected to drive significant improvement in margins and the bottom line with sustained investments and debt reduction. For 2020-2022, AT&T continues to expect consolidated revenue growth of 1-2% per year. Adjusted earnings are expected to be $4.50-$4.80 per share by 2022 with adjusted EBITDA margin of 35%. While adjusted EBITDA margin is expected to be stable in 2020, it is likely to grow in 2021 and 2022, driven by extensive company-wide cost-reduction plans, WarnerMedia synergies, continued Mobility growth and AT&T Mexico EBITDA improvement. Free cash flow is anticipated to be $30-$32 billion for 2022, with net-debt-to-adjusted EBITDA of 2.0X to 2.25X, as 100% debt related to the acquisition of Time Warner assets is likely to be repaid.
We are impressed with the focused attempts of this Zacks Rank #3 (Hold) company to maintain a competitive edge amid these turbulent times. You can see the complete list of today’s Zacks #1 Rank(Strong Buy)stocks here.
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