Summary
- The management team at AT&T made another nice, value-accretive move for shareholders by divesting more non-core assets.
- These assets are located in Puerto Rico and the U.S. Virgin Islands and appear to be largely unprofitable.
- The cash proceeds allow the firm to easily surpass its 2019 asset sale target and to make meaningful progress toward its planned net leverage ratio.
- Though some details are still unknown and will probably remain that way, investors should see this as a generally positive development.
- I do much more than just articles at Crude Value Insights: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »
The management team at AT&T (T) is at it again. As the company seeks to right-size its balance sheet and focus on its core assets, it has been liberal about divesting non-core assets. With this latest move, the firm's decision to sell off its operations in Puerto Rico and the U.S. Virgin Islands, the company will have completed around $11 billion in asset sales this year alone, handily surpassing the $6 billion to $8 billion in divestitures previously anticipated. Though this will lead to a loss of revenue, the end result, particularly with this sale, should be a healthier, more profitable entity with a smaller overall operational footprint.
A look at the sale
At its core, this sale of assets, which the company made to telecommunications firm Liberty Latin America, is straightforward. In short, AT&T is handing over its business operations in Puerto Rico and the U.S. Virgin Islands to Liberty in exchange for $1.95 billion in cash. Naturally, this is subject to post-closing adjustments, so the ultimate amount of cash transferred could change but such adjustments are typically small.
Though a great deal of specifics was left out from the press release, we do know that this transaction includes both wireless and wireline operations, including network assets, spectrum, real estate, current leases, and existing customers. On the wireless side, this sale involves 1.1 million subscribers. To maintain the business, the company is also transferring over 1,300 of its employees, though it is uncertain how many of these, if any, Liberty will end up retaining. Perhaps more important than knowing what's included is knowing what's not included in the deal.
According to management, AT&T will retain its FirstNet operations in the regions as well as its DirecTV and other business relationships. It's difficult to tell how valuable any of these, in particular, is when it comes to the relevant regions, but it's safe to assume that keeping the FirstNet build-out in Puerto Rico and the U.S. Virgin Islands is excellent for the company. As I have written about in a prior article, FirstNet is proving to be a phenomenal growth area for the telecommunications and entertainment giant and any chance to keep that will likely be value-accretive to the firm long term.
Not only will certain assets be retained by AT&T, but the firm also announced that Liberty will help support the company's continued growth pertaining to these lines of business. Liberty understands the need for LTE coverage and capacity aimed at meeting the needs of first responders within the region, so while any financial terms on this front have not been provided, it's likely that AT&T will remain, in general, a beneficiary of anything agreed upon on that front.
Using the cash proceeds from the transaction, which the company hopes to close within 6 to 9 months, it intends to pay down even more debt. As of the end of the company's second fiscal quarter this year, it had net debt of $162.14 billion, so this by itself will have only a minimal impact on the firm's balance sheet, but when you consider that the telecommunications firm should generate $28 billion in free cash flow this year alone, and that it, in the first two quarters of this year only, paid off debt of $16.12 billion, it become clear how dedicated management is to this initiative and how quickly, between cash flow and asset sales, the firm can reduce its leverage. Management's goal, by the end of this year, is to see the company's net leverage ratio fall to around 2.5. This would represent a sizable improvement over the 3.24 the ratio ended last year at (or 3.11 using adjusted EBITDA instead of pure EBITDA).
