Currently, DirecTV is in the process of being spun off from AT&T, which acquired it through a $16 billion deal in 2015, with 61% of the stakes of the new company owned by AT&T and the remaining 39% by TPG Capital, a private equity firm. There are a few key reasons why AT&T has decided to walk away from the DirecTV business only a few years after acquiring it: There are a few key reasons why AT&T has decided to walk away from the DirecTV business only a few years after acquiring it:
1. Lack Communication and Collaboration Between the Businesses
One of the key reasons for AT&T to acquire DirecTV was the prospect to sell existing and novel services in combination with mobile, Internet, and video services. Nevertheless, AT&T eventually failed to develop many concrete and viable synergies of its core operations with the DirecTV division. They witnessed little incremental growth in offering DirecTV bundled with AT&T wireless, internet or other services. Lacking major synergies, having ownership of DirecTV was not as beneficial and sensible for AT&T.
2. Cord-Cutting Accelerating
The rate of cord-shaving or the process where consumers abandon traditional paid TV subscriptions increased notably since 2015 when AT&T closed the acquisition of DirecTV. Mobile video and free internet video, renting movies through services like Netflix and Hulu and Hulu, have given better options not to subscribe satellite or cable TV access. DirecTV lost subscribers it had roughly 21 million when AT&T purchased it but currently, it stands at roughly 15 million pressures that significantly affect the financial health of the business unit.
3. High Debt Load
The largest deal was undertaken by the company in mid-2015 when AT&T borrowed a lot of money to acquire DirecTV for $67 billion. Currently, AT&T holds a total of $180+ billion via debt. This large debt load has lead AT&T’s management to attempt to decrease costs and sell off divisions that are not core to their business, such as DirecTV, and remain focused on Wireless, 5G, and Fiber Broadband divisions. This will help AT&T deleverage since getting DirecTV’s over $16 billion in debt off the balance sheet is expected to be beneficial.
4. Instead of making it complicated, they should just focus on the HBO Max app.
With HBO Max and AT&T TV now in the market, AT&T is now moving away from the traditional linear video distribution and is aiming at selling OTT, direct-to-consumer live TV and premium VOD services under its own umbrella. DirecTV does not fit into this new strategy as well as AT&T Channel Lineup and TV Listings who can bundle streamed cable channels and OTT services with HBO Max. The decision deepens HBO Max and AT&T TV instead of the satellite TV model of distribution provides more control to AT&T instead of simply relying.
5. Opportunity to Extract Value
However, AT&T does not think it is impossible for DirecTV to reap value out of it as they are currently threatened by cord-cutting phenomena as a majority ownership stake in the firm is being sold to TPG Capital. At the same time, the level of profitability and cash flows at DirecTV remain rather high even with the given subscriber base erosion. This $16 billion value gives AT&T the chance to get its money back for the initial investment made as well as bringing in TPG Capital to possibly turn DirecTV around as a separate company.
Consequently, AT&T plans to divest DirecTV as the entity never met the objectives it set for the acquisition because cord-shaving escalated beyond expectations, DirecTV no longer aligns with AT&T’s video plan, and closing the debt gap to focus on 5G deployment is strategically sound. It is not the case now, that DirecTV is a strategic asset for AT&T, and that is why it will sell it to TPG Capital, but DirecTV still has standalone value. It will be better for both to move apart to start devising a new strategy to cater with the rapidly changing dynamics of the video market.
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