New Proposed DirecTV Asset Sale Makes More Sense

The report that AT&T is in discussions with private-equity firms to sell a significant minority stake in its DirecTV, AT&T Now and U-Verse pay-TV businesses is not surprising. Nor is the way the potential deal is being structured. 

As described, the transaction that would shift legacy assets off AT&T’s balance sheet, but also allow AT&T to retain “majority economic ownership of the businesses.” That is important for its cash flow implications. 

My own analysis of the original value of the DirecTV purchase was its impact on AT&T cash flow. That is the same key issue for any sale of the asset: what does it do to cash flow?

As originally rumored, AT&T was looking to sell most of its DirecTV holding. That seemed unlikely to me simply because, in doing so, AT&T would be parting with an important source of free cash flow, which might have been as much as 13 percent of total cash flow, or possibly more, by some accounts 

In late 2019 DirecTV was said to be spinning off about $4 billion in annual cash flow, which seems low to me, but appears to be about right. In the first full year of ownership, DirecTV likely produced $12 billion of free cash flow. 

That matters as AT&T needs prodigious amounts of cash to support its dividend payouts and to reduce outstanding debt. In 2019, for example, DirecTV cash flow represented as much as 93 percent of total interest payments and a huge portion of revenue. 

Cash flow generators that big are rare, indeed. Though controversial, it is hard to conceive of any other investment AT&T could have made in 2014 that could possibly have generated as much free cash flow as did DirecTV.

To be sure, linear video in general, and satellite linear in particular, have been hard hit since then. The asset value has atrophied, to be sure. But if cash flow is the objective, some of us cannot conceive of any other acquisition that would have been possible and not drawn antitrust objections. 

The new rumored deal would reportedly include 30 percent to 49 percent of the combined pay-TV distribution businesses, moving assets off AT&T’s balance sheet, but preserving much of the cash flow.

That at least answers the question some might have had about any exit from DirecTV in total.