Spin-offs serve a great purpose for investors, and ultimately for the companies they involve. A properly done schism can unearth tremendous value in a company that otherwise would be buried among the muck. It's unfair to say that any part of this company is "muck," but with its two main segments differentiating themselves, it may serve all parties best if two companies were to emerge.
Complimentary or parasitic?
In its most recent report, DirecTV (Nasdaq: DTV) showed varied results. The market, as it loves to do, focused on the negative, while there were tremendous results from the most important part of the company.
Bloomberg's headline for the satellite company's second quarter results: "DIRECTV loses 169,000 net subscribers." That is true, though even with the U.S. business losing subscribers, it also witnessed its best operating profit in two years. Earnings per share, because of repurchases and solid results, increased 20% to $1.09 per share.
What Bloomberg didn't find headline-worthy was that DirecTV's Latin American operations grew its subscriber base at the fastest rate yet. The company saw net additions of 645,000 subscribers in the region -- far beyond expectations. As I have mentioned in multiple stories before, Latin America has pay-TV penetration levels less than half that of the United States and Canada. There is unbelievable opportunity for growth in the area, and DirecTV is the only major satellite provider making the effort. DISH Network (Nasdaq: DISH) has focused the majority of its time trying to launch a 4G network and compete with major telecoms and the government.
So with North American operations steady, though not particularly impressive, one could make a case for a spinoff of Latin American operations.
A horse with a slightly different name
DirecTV LatAm is a high-growth organization that could command a premium relative to any of its closest competitors. A division of the two companies would allow Bruce Churchill, the showrunner for DirecTV LatAm, and his team to more narrowly focus on their core business without having to work within the larger DirecTV structure as it exists today. In the meantime, DirecTV North America could further refine its strategy of maximizing profit per subscriber and pushing fat-margin premium services.
Churchill would be the obvious CEO of the new company. He has done an absolutely stellar job figuring out how to navigate the relatively new Latin American pay-TV market.
Avoiding it like the plague
DirecTV and DISH's big concern: content costs. The recent scandal with Viacom's (NYSE: VIA) Nickelodeon network and other channels had investors and customers upset, but competitors loved every minute of it. By depriving customers of cable basics, it gives them an opportunity to reconsider their pay-TV position -- specifically whether they want to switch over to a streaming on-demand service, such as Netflix (Nasdaq: NFLX).
The net subscriber loss for DirecTV had analysts suggesting that more consumers are switching over to a Netflix-like service than expected.
With a spinoff, DirecTV LatAm would be somewhat isolated from the streaming risk, which is not as prevalent in the region. As for the North American company -- it could benefit from a closer focus on combating Netflix and other content provider options.
A history of spinoffs
A spinoff wouldn't be too out of character for DirecTV. In 2009, the company merged with Liberty Media's (Nasdaq: LMCA) Liberty Entertainment.
Both DirecTV businesses would still benefit from each other's economies of scale and overlapping business --a spinoff would not negate that, and actually could enhance it.
Will it happen any time soon? Doubtful. There has been little to no talk regarding a DirecTV spinoff, though maybe someone should write Bill Ackman an email and tell him his next project awaits him.
In the meantime, the aforementioned Netflix is a company oft-mentioned here at the Fool. Some of us love it; others are concerned about content costs and scalability. As with any investment opinion, both sides hold validity. Check out this premium report that highlights the challenges and opportunities ahead for the streaming king.
