When AT&T (NYSE:T) announced that it would acquire DirecTV in 2014, it was initially billed as a way to create "a unique new competitor with unprecedented capabilities in mobility, video and broadband services." However, that acquisition hasn't played out well. AT&T spent $67.1 billion in total, including absorbing DirecTV's net debt load, while the transaction pegged DirecTV's equity value at $48.5 billion.
The purchase was poorly timed, as cord-cutting has continued unabated in the years since. AT&T has been bleeding out video customers, including 4.5 million over the past year. A little over a year ago, activist investor Elliott Management quietly accumulated a stake, criticized the DirecTV acquisition for occurring "at the absolute peak of the linear TV market," and called for AT&T to divest the botched purchase in order to eliminate distractions and focus on the core business.
Ma Bell is reportedly approaching a deal to sell off DirecTV, taking a massive hit in the process.
A $50 billion loss
Reports first surfaced in late August that AT&T was looking for private equity investors who might be interested in buying DirecTV's satellite TV business. That process has progressed, and the final sale price is expected to be just over $15 billion, The New York Post reports.
DirecTV generates earnings before interest, taxes, depreciation, and amortization (EBITDA) of approximately $4.5 billion, and potential buyers are offering 3.5 times that amount. That would translate into an offer of $15.75 billion, according to the report. If AT&T accepts such a low bid, it would lose over $50 billion when factoring in the total that it paid, including for DirecTV's debt that the telecommunications giant is still on the hook for.
AT&T took on even more debt for its subsequent acquisition of Time Warner, and total debt stood at a whopping $169 billion at the end of the second quarter. Elliott wants AT&T to aggressively pay down debt while still preserving its dividend and share repurchases.
Potential suitors include Apollo and Platinum Equity Partners, according to the report, and other interested parties are trying to line up financing for a leveraged buyout (LBO). But lenders are skeptical about the deal, too, since DirecTV continues to hemorrhage subscribers.
AT&T doesn't break out DirecTV results directly, but the subsidiary represents an estimated 80% of AT&T's total video connections, which stood at 18.4 million at the end of the second quarter. It probably doesn't help that AT&T increased TV prices earlier this year, just six months after hiking prices in late 2019.
Telecommunications and media companies have all been aggressively pivoting to over-the-top (OTT) streaming services, including AT&T's own HBO Max that launched earlier this year to much fanfare, grabbing 4.1 million new subscribers in the first month alone. Those subscriber additions in a single month nearly offset the 4.5 million video subscribers that AT&T lost over the past year.