Summary
- AT&T is unlikely to get a private equity bid for DirecTV at $20 billion.
- The market may not even welcome such a low price for a business originally having a transaction value of $67 billion.
- DirecTV appears to generate up to $5 billion in operating cash flows.
- The stock is unlikely to rally on such a deal to unload DirecTV on the cheap due to lower operating cash flows.
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News reports are suggesting that AT&T (T) might sell its DirecTV unit for up to $20 billion. The wireless and media company paid $49 billion for the company back in 2015, but investors shouldn't be assured that a private equity buyer will pay such a large sum for a declining business. My investment thesis is that AT&T continues to lose relevance, and any ability to focus the business is a positive, but the price tag for DirecTV isn't necessarily value-creating.
Image Source: AT&T website
DirecTV Business In Decline
One really has to ask why private equity or any other business would want to pay billions for a business in major decline. Consumers are cutting the cord at record rates, and the pace isn't expected to slow down, as the move to streaming services only escalated during the COVID-19 crisis.
In addition, new SVOD services continue providing more content at cheaper costs. Video distributors such as AT&T via DirecTV have less and less value in this scenario, where Disney+ (DIS) and Apple (AAPL) TV+ charge far less than $10 per month for content. In both cases, subscribers can get these services for free with subscriptions to other services, such as wireless plans or other SVOD services via a bundle.
Since 2010, only the 65+ crowd has spent more time watching pay TV. Key demographics under 49 have all cut viewing times by over 50%. The sad part for AT&T shareholders is that this trend was obvious back when the DirecTV deal was made in 2014.
