Asserting further confidence that its Time Warner merger will get the green light, AT&T is preparing to fund the $85 billion price tag by filing for a potential US IPO of a minority stake in DirecTV Latin America – a precursor to heavier divestitures perhaps. Reducing its presence in the region opens opportunities for existing incumbents like America Movil, as well as possibilities for the newly formed Liberty Latin America business to recover recent TV losses.
AT&T’s assets in Latin America and the Caribbean are valued at over $10 billion and DirecTV has around 13.6 million subscribers across its footprint in eleven countries, through holding company Vrio. AT&T estimates up to $100 million will come its way from the IPO, but as its Time Warner takeover is expected to drive debt to more than $180 billion, we believe the US operator is setting the scene for a full sale of at least some of the Latin American assets.
While AT&T will maintain majority voting control in Vrio following an IPO, the company’s filing states plans to request a ruling from the International Revenue Service to pursue a tax-free split-off or spin-off of its remaining interest in Vrio, dependent on market conditions.
Vrio has therefore issued guidance that AT&T will not be restricted from competing with it in the digital entertainment services sector should it seek to reenter the region, including as a result of acquiring a company operating a Latin American DTH business. “Due to the significant resources of AT&T, it could have a significant competitive advantage over us should it decide to engage in the type of business we conduct, which could adversely affect our business, financial condition and results of operations,” said Vrio’s SEC filing, posted last week.
Underinvestment in broadband infrastructure and under-penetrated pay TV markets in Latin America makes the IPO and potential sale of DirecTV Latin America assets a compelling prospect, according to AT&T, citing residential broadband penetration of just 36.2% in 2016 (excluding the Caribbean). Average broadband speeds are also lagging, and AT&T believes this limits exposure to broadband-video bundling threats and reduces the competitive threat from OTT video services. In addition, the filing highlights only 38% of the 118 million TV households in the region subscribed to pay TV, compared to 81% of the 121 million TV households in the US and over 62% in other developed regions like Western Europe.
Parts of the filing read as a sales pitch for AT&T’s Latin American assets, strongly suggesting a sale will soon follow. The projected $100 million AT&T will earn from the IPO won’t make a dent in its debt, although a float could pump this up to a healthy $8 billion.
Yet there is always the notion that we are merely scratching the surface of any move made by a company like AT&T. So we would like to float an idea of our own, that AT&T is taking the opportunity to promote investment in broadband infrastructure in Latin America, as a way to prepare the market for the introduction of DirecTV Now in the future, while reducing debt at the same time.
We think such a move is a long way off, yet certainly an opportunity AT&T will be investigating as broadband networks are developed across Latin America and demand for OTT video increases, particularly given the successful uptake of DirecTV Now in the US.
While areas of Latin America still have plenty of growth left in pay TV and DirecTV Latin America has seen subscriber gains, adding 139,000 net video subscribers in Q4 and growing 1.1 million in a year, the story is not the same across the board. This was observed in Liberty Latin America’s first solo set of results last month, losing 21,000 video subscribers in the fourth quarter on a combination of cable and DTH.
The SEC filing contradicts itself, on one hand claiming pay TV is not threatened by the emergence of OTT services, yet later on stating, “We face competition from both OTT video streaming providers that deliver movies, television and other video programming over broadband internet connections and pay TV providers that have launched digital streaming services.”
Vrio is rattled by its parent company’s move and fears adapting to a changing industry is not something it can achieve independently. “There can be no assurance that our services will be able to compete with these streaming providers. In addition, many of our existing agreements with content providers do not explicitly allow for content to be delivered on an OTT basis. As a result, we may be unable to deliver the same premium content that we currently provide as a DTH service, and we may not be successful in attracting or retaining customers who seek an OTT offering, which could harm our competitive position and our business.”
Additional knock on effects to Vrio’s business in Latin America following the Time Warner merger could come from Sky Brasil and DirecTV Chile, both part of Vrio, which have agreed not to discriminate against unaffiliated content providers in favor of Time Warner-affiliated programmers, if the deal is approved. However, any breach of this agreement could lead to regulatory action against Sky Brasil or DirecTV Chile, causing further disruptions to Vrio.