If last week's headlines suggesting that telecom giant AT&T (NYSE:T) should shed its pay-TV service DirecTV rang familiar, there's a reason. The topic was broached in September 2019 as well. Though, for the record, the idea has been in circulation since the middle of last year, when reports emerged that DISH Network (NASDAQ:DISH) was entertaining the idea of a merger with its peer. Indeed, the idea that AT&T would be well-advised to sell its struggling satellite TV business has been in the back of a lot of investors' minds for a while now.
It hasn't happened yet, of course, but the fact that discussions of it continue to be revived raises several questions, chief among them: What is DirecTV actually worth to AT&T?
DirecTV, by the numbers
It's not laid out in detail on AT&T's income statements, but within the finer print of the company's quarterly and annual filings, it divulges some of the specifics. Last fiscal year, AT&T collected $32.1 billion in video entertainment revenue from consumers. That figure -- which was just over 22% of the company's total 2019 revenue of $142.4 billion -- includes the income from all of its TV services, including those not part of the DirecTV family like AT&T TV and U-Verse television. Still, DirecTV provides the lion's share of this unit's revenue.
What's less clear is how much profit came from that $32.1 billion in revenue.
While the company breaks out the top-line numbers for each major business unit, it doesn't offer comparable figures for their operating income or EBITDA. Rather, AT&T supplies investors with an operating income tally for its entire entertainment group, which also includes high-speed internet service, voice telephony, and other service and equipment sales. All told, the entertainment group did $45.1 billion in business last year, producing operating income (which included some depreciation) of $4.8 billion.
Still, the company's choice to withhold the details about DirecTV's profitability doesn't mean we can't make some educated guesses about it. We just have to take a look at the company's most comparable competitor to get an idea of the sort of margins that the pay-TV business -- and satellite TV in particular -- are supporting these days.
Enter DISH Network.
Of DISH's $12.8 billion in 2019 revenue, nearly $1.9 billion was turned into pre-tax (though post-deprecation) operating income. This figure also reflects DISH's streaming SlingTV business, although like DirecTV, most of DISH's results still reflect its traditional pay-TV business. Total operating margins? Call it 15%. That's in the same ballpark as operating profit margins of 10.7% for AT&T's entertainment group in its entirety, which gets more than 70% of its revenue from TV alone.
Splitting the difference and coming up with a rough operating profit margin figure of 12.8%, one can estimate that the television business contributed around $4 billion worth of operating profits to AT&T in what was a fairly typical 2019.
The customer-loss trend is a drag
These are back-of-the-envelope calculations, mind you, meant more to provide a sense of scope than to give prospective DirecTV acquirers the detailed information they would need in order to do their due diligence. But that rough math still supplies investors with a starting point for calculating approximately what DirecTV might command in the open market. Two methods for performing that calculation lead to similar results.
New York University's Stern School of Business keeps tabs on the data, and based on its most recent analysis found the average cable TV company's enterprise value was around 18.5 times its earnings before interest and taxes. Not counting the impact of depreciation, the typical cable company's earnings-based valuation multiple falls to around 10. Without knowing exactly how much depreciation to specifically assign to DirecTV, we can broadly say this earnings-based valuation approach would lead to a plausible sale price for the business of around $60 billion.
That's a surprisingly big number, but it's in line with the valuation that comes out of a sales-based formula.
The S&P 500's current average price-to-sales ratio is 2.11 according to Multpl, and numbers from Yardeni say the same. At that valuation, AT&T's DirecTV business would arguably be worth something on the order of -- you guessed it -- $60 billion.
That's not a price AT&T would actually be likely to fetch for the unit, however, for one simple reason -- the downward trajectory of its customer numbers. AT&T paid $49 billion for the satellite television name back in 2015, but that was when it had 26 million paying subscribers. AT&T now serves fewer than 20 million television pay-TV customers including those using non-DirecTV services, and it's continuing to lose them on both fronts.
It's that downtrend, in fact, that prompted FOX Business panelist Charlie Gasparino (who raised the sale prospect again last week) to explicitly and bluntly say, "They [AT&T] are not going to get the tens of billions of dollars they paid for it," as any buyer would first need to simply stop customer attrition in an environment where cord-cutting is a growing trend. As even DISH Network CEO Charlie Ergen conceded during his company's fiscal Q4 conference call in February, "You can't swim upstream against a real tide of over-the-top players."
It's not the first time Ergen has given investors reason to think DISH is the most likely suitor for DirecTV.
Take it with a grain of salt
Take all of it with a grain of salt. AT&T -- the most important player on the stage right now -- continues to say nothing about a potential sale. Nor is there any public word from the presumed suitors, nor from any of the middlemen that might help facilitate such a deal. Price-based speculation is just that -- speculation. DirecTV is only "worth" what a potential buyer is willing to pay for it -- if a buyer can be found. Clearly, DirecTV is a project.
Nevertheless, it's good to know what the DirecTV-led television business is worth to AT&T's top and bottom lines. And right now, that's not a whole lot, especially given the headaches it also creates for the company.