• DirecTV’s subscriber base has plunged from 25.4 million in June 2018 to about 18.4 million this past June
  • AT&T paid $49 billion for DirecTV in 2015
  • A merger between DirecTV and its principal rival Dish Network has long been speculated upon

As AT&T (T) seeks to unload its DirecTV satellite business, some analysts have warned that finding a buyer will be difficult.

The El Segundo, Calif.-based direct broadcast satellite service has lost millions of video subscribers in recent years as well as billions of dollars since AT&T acquired it in 2015.

But the Wall Street Journal reported that AT&T has conducted preliminary discussions about a potential sale with private equity firms including Apollo Global Management Inc. and Platinum Equity.

DirecTV’s subscriber base has plunged from 25.4 million in June 2018 to about 18.4 million this past June as streaming services like Netflix (NFLX) have soared in popularity.

As the video satellite business has declined in recent years it will be hard for AT&T to come close to recouping the $49 billion it paid for DirecTV.

"We do not expect the potential deal to be anywhere near the $49 billion AT&T paid for the business in 2015, with some sources saying the price could be under $20 billion," said Keith Snyder of CFRA Equity Research in a research report. (The Wall Street Journal speculated DirecTV would generate a sale of about $20 billion).

Craig Moffett, a senior research analyst at MoffettNathanson, said that to make a disposition work, AT&T somehow would have to make such a deal large enough to be a positive for leverage targets. He estimated that after taking into account operating leases, pension obligations and post-retirement health benefits, AT&T is currently levered at close to 3.5-times earnings before interest, taxes, depreciation and amortization, or EBITDA.

"Any DirecTV sale at a multiple lower than their leverage ratio would make their leverage ratio worse, not better. That's simply not an option," Moffett said, according to S&P Global Market Intelligence,

As a result, AT&T will have to identify a buyer willing to pay more than 3.5-times EBITDA for DirecTV. (Moffett doubts anyone would pay above that level).

“To be sure, no one could argue that AT&T wouldn’t be better off without the albatross that is DirecTV. But we’ve been skeptics about the feasibility of a deal … and we still are,” Moffett wrote.

AT&T does not break out specific EBITDA figures for its satellite business, but its entertainment group – which includes wireline TV and broadband businesses – reported EBITDA of about $10 billion last year.

Moffett said DirecTV’s subscriber base is dropping “at the astounding rate” of 18% a year, and estimates its EBITDA is “falling in the high teens.”

Thus, AT&T will likely suffer a huge loss on any sale of DirecTV, Barron’s reported.

Moffett also scoffed at the notion of a private equity firm wanting to acquire DirecTV.

“No private equity buyer could assume an exit from the investment – an IPO, say, or a flip to someone else down the road – again because the rate of decline is so rapid,” he said. “So a buyer would have to assume they would be running the business for cash. The only way for a potential buyer to meet a reasonable return hurdle in that scenario would be to get in at a very low entry multiple.”

Tara LaChapelle, a Bloomberg Opinion columnist, wrote that DirecTV has “faded into the background at AT&T, a company now entirely focused on competing in 5G wireless connectivity and online television. Any DirecTV user can attest to how the service has been neglected in recent years, and the business might be forgotten by investors if it weren’t for the headline-grabbing subscriber losses it’s mounted each quarter.”

But LaChapelle also noted that a buyer of DirecTV could be attracted to its cash generation.

“DirecTV still throws off quite a bit of [cash], which explains why private equity firms including Apollo Global Management Inc. and Platinum Equity are said to be taking a look,” she wrote. “Financial suitors want businesses that generate lots of cash because they can support dividends and the debt load needed to take them private – although DirecTV’s ability to do so is certainly diminishing.”

Separately, a merger between DirecTV and its principal rival Dish Network (DISH) has long been speculated upon – but even that transaction faces problems.

For one thing AT&T has admitted such a deal would likely be nixed by regulators over fears that direct rivals combining in concentrated markets would kill local competition.

“From a regulatory perspective, [talk of a merger] hasn’t been successful and I don’t know that there is any change in that regulatory perspective,” AT&T’s Chief Financial Officer John Stephens said last year. “I understand the industrial logic, but quite frankly it’s been tried and has been rejected.”

But Charlie Ergen, chairman of Dish, thinks a merger is “inevitable.”

“Is [a merger with DirecTV] one month from now or two years from now? I don’t know,” he said during a conference call with analysts last month.

But Moffett rejected the notion of any merger between DirecTV and Dish.

“Even merged with Dish, pro forma subscriber losses for the two combined would be running at 15% per year,” Moffett said.

Moffett noted that while both Dish and DirecTV dominate rural regions of the country – where broadband internet and streaming options are far less prevalent – efforts by cable companies to buildout broadband in rural areas could kill the satellite industry.

“If we see a huge post-COVID stimulus-infrastructure bill next year targeting broadband expansion, as seems likely, then the defensible rural segment will all but disappear,” Moffett added.