AT&T’s DirecTV Spin ‘Credit Positive’, Says Moody’s


Thursday evening’s big headline across business media was AT&T‘s revelation that it will sell a 30% stake in its satellite and terrestrial video services provider business, inclusive of DirecTV. The entity grabbing the stake: TPG Capital.

For Moody’s Investors Service, this is a credit positive move for AT&T.

The deal includes AT&T’s DirecTV, U-Verse, and all of AT&T’s virtual MVPD business, AT&T TV.

The transaction values DirecTV at about $16 billion, which is down considerably from the $67 billion that AT&T paid (including debt assumption) to acquire DirecTV in 2015.

TPG will pay $1.8 billion for its stake, which will include TPG receiving senior preferred equity yielding 10%. AT&T will have junior preferred equity in DirecTV that will PIK.

The new company will incur about $6 billion of new debt, with the proceeds expected to be distributed to AT&T at the close of the transaction.

As the DirecTV valuation is low, the transaction, Moody’s says, “is moderately credit positive for AT&T only because we expect that it will provide AT&T with about $7.8 billion of proceeds, which we expect will be used to help offset the company’s C-band auction cost obligation, which as a result, should quicken AT&T’s leverage reduction.”

The deal also includes AT&T funding about $2.5 billion of net losses from the NFL Sunday Ticket contract for the 2021 and 2022 seasons.

“The significant decline in DirecTV’s valuation is largely driven by the secular pressure hitting the linear pay-tv industry as consumers switch to over-the-top (OTT) MVPDs, subscription video on-demand (SVOD) and advertising video on-demand platforms, such as Netflix, Inc., Disney+, Amazon Prime, CBS All Access, HBOMAX and others,” Moody’s notes. “These secular headwinds as well as competition for resources within AT&T and failure to manage competitively have caused the company’s DirecTV business to be one of the hardest hit in the industry, as the company has lost over 7 million video connections over the past two years.”

Moody’s believes that DirecTV has been “a drag” on the company’s overall equity valuation.

Thus, it says, “it is logical that management would sell a part of this declining business and structure the sale such that it is deconsolidated from AT&T.”

Due to the pandemic, the company has shifted its strategic priorities and is now focusing on four things:

  • investing in fiber/5G
  • investing in streaming
  • restoring the balance sheet to historical strength levels
  • supporting the dividend

As a result, AT&T has divested multiple non-core assets over the past year.

In December 2020, the company announced the sale of its anime streaming service, Crunchyroll, to Sony Pictures Entertainment Inc., a wholly owned subsidiary of Sony Corporation, for $1.175 billion.

In October 2020, the company also closed on about $3 billion in proceeds from the sales of Central European Media and real estate, and the sale of its Puerto Rico and US Virgin Islands wireless business.