Another AT&T activist investor proposes Dish-DirecTV tie-up

Elliott Management’s recent tirade against AT&T, highlighting above all else the operator’s shoddy M&A history, has sparked another private equity investor into action. Apollo Global Management late last week proposed a plan to offload a portion of the dwindling DirecTV operation through a merger with Dish Network – while still keeping control of the satellite service.

However, AT&T COO John Stankey recently insisted there were no plans to sell DirecTV, claiming the satellite arm remains an integral part of future plans, even with the emphasis on the impending HBO Max streaming video launch.

Apollo has therefore advised AT&T to fold DirecTV into Dish Network to create a new company, of which AT&T would retain ownership, financed by Apollo. The private equity firm estimates AT&T would be set to generate approximately $25bn – half the fee AT&T handed over just four years ago. With DirecTV’s subscriber base in freefall, the company should be biting Apollo’s hand off at the very prospect of a 50% return on investment. Sources speaking to Fox Business claim Apollo is willing to sink an unspecified value of $billions into the newly formed business.

“What no one has picked up on is just because AT&T has said it doesn’t want to sell DirecTV, doesn’t mean it won’t spin it off. This proposal is not a direct sale,” according to sources who spoke to Fox Business.

The deal would still not obviously make sense for Dish, though merging the two pay-TV operators’ respective assets and forming an entirely new company would be a safer bet than an acquisition.

“The joint venture idea would be attractive, bankers argue, because there probably won’t be many buyers for DirecTV given its business outlook,” states the report.

Combined, Dish Network and DirecTV shed 857,000 satellite TV subscribers during Q2 2019, of which DirecTV’s losses accounted for an overwhelming 90.8%. Surely not numbers Dish Network would be eager to inherit, yet a footprint exceeding 30m pay TV subscribers would offer Dish Network serious opportunities and we would argue Dish is better positioned to manage DirecTV.

The situation is complicated, however, with Dish Network caught up in a deal to pay $3.5bn for spectrum and $1.5bn for Sprint’s prepaid Boost mobile businesses, creating a fourth major carrier and paving the way for T-Mobile and Sprint’s $26.5bn mega-merger. The fear is that with Dish paying $5bn all-in, the operator has less in the bank to support its own struggling satellite TV business and even less in the tank to persevere with the live streaming service Sling TV. That’s before we’ve even discussed building out 5G infrastructure. But now with the world’s largest equity firm Apollo fronting a sizable sum to command the next chapter, investors on both sides will be more inclined to pursue a merger.

Dish is dwindling on 12m total video subscribers, covering 9.5m Dish TV satellite subs and 2.5m on Sling TV, which gained 48,000 subscribers to offset satellite losses of 79,000 in the second quarter – making it a net decline of 31,000 video subs. As of the last quarter, AT&T had a video base of 22.9m (21.6m satellite and 1.3m DirecTV Now), set to drop again substantially as Q3 results loom. AT&T’s are due out on October 28.

Apollo’s proposition would also slot in nicely with Elliott’s own four-pronged overhaul-plan-come-public-hanging delivered in a letter to AT&T last month – going to extreme lengths to kick the operator’s inept (in Elliott’s view) leadership into life. Above all else, Elliott proposed a strategic shift from acquisition to operations, highlighting a stop to material M&A, alongside comprehensive reviews of strategies and operations, and increasing management accountability.

We noted last week how the sale of AT&T wireline and wireless assets in Puerto Rico and the US Virgin Islands to Liberty Latin America has all the makings of a precursor to a more significant deal, even with AT&T retaining DirecTV assets in the two countries along with the FirstNet business.