AT&T seems fine selling DirecTV Latam to get Time Warner done

When we first analyzed out the fate of the Latin American arm of DirecTV under AT&T, it was without the context of the company also bidding for Time Warner, a move which now complicates the approvals process throughout Latin America.

The fairly glib pronouncements last week that Brazil regulators were against the Time Warner deal, but Mexico’s were in favor, hides a devil of a lot of detail. We said in that first analysis in 2016 that we saw Sky Brazil being sold to use the funds to shore up capex in Mexico, where the relationship between AT&T’s new cellular operations and Sky Mexico might be strengthened. Joint owner Televisa might even by bought out.

Of course Mexico’s Federal Telecommunications Institute (IFT) is only four years old formed with the express purpose of curbing the excesses of Carlos Slim’s interests, he was once reported as controlling 80% of fixed lines in Mexico and 70% of cellular connections. On the one hand the IFT needs to be encouraging non-Slim investment in its telecommunications infrastructure, on the other it does not want to replace a local monopoly with a foreign owned one.

The conditions of Mexico’s IFT to accept the AT&T merger with Time Warner last week have materialized, despite AT&T simply putting out a press release saying that the deal had been approved. It now turns out that approval is dependent upon AT&T selling its Sky Mexico stake, a company it owns 41% of with local media group Televisa holding the rest of. It is also dependent upon the line of control of HBO in Mexico, not going through AT&T. Effectively it is worried that the content groups could stich up markets, and that the AT&T cellular operations built around Iusacell and Nextel acquisitions in 2015, could be used to become a monopolistic route to market for Time Warner content.

So while this does not derail the wider Time Warner acquisition, it does put another deal on the table – the sale of all of part of DirecTV Latam operations –  especially after the Brazilian regulator expressed similar concerns last week.

When we first assessed the deal we felt that AT&T would be happy to sell Sky Brasil, a business it owns 92% of, and would want to spend the money cementing the Mexican operations. Really AT&T has little interest in being purely in the video business, in markets where it has no cellular infrastructure, and that would mean that if it has to sell off DirecTV subsidiaries in both Brazil and Mexico, it might just as well sell off all of its Latin American DTH operations, a move that might see it raise over $10 billion, to pay down the $143 billion debt mountain it raised to buy both DirecTV, and Time Warner.

The Mexican regulator said that the transaction would allow AT&T to “develop and provide video services through its multiple platforms, including AT&T’s mobile networks, which could increase the demand of mobile broadband and improve the use of their networks”. Not sure we see what’s wrong with that exactly given that AT&T is not a dominant cellular provider in Mexico and neither is Time Warner content dominant.

In Latin America OTT is posing a very direct threat to DirecTV’s established subscriber base in some markets. In Brazil OTT has become big business with about 40 commercial online services that are now seriously disrupting legacy pay TV.

AT&T may regret selling off satellite TV services in Latin America if it decides to shift into another Latin American market in the coming years. But its insistence that the Time Warner deal is on track to complete this year suggests that it has no problems selling those Latam assets rapidly, either before or promising to after a deal is struck.

Last year possible buyers were the other major regional players, America Movil, Telefonica and Televisa. It makes sense for Televisa to buy AT&T out od Sky Mexico, and one of the others in Brazil.

The other contender that has been mentioned is Liberty Global, whose only Latin American market currently is Chile where it is number one in pay TV with VTR, but which could at a stroke become Latin America’s joint top operator with America Movil if it took over the whole of DirecTV’s business in the region. But it has little satellite experience outside its favored cable markets.