Although speculation of a merger between AT&T’s (T) DIRECTV and Dish Network (DISH) keeps popping up, it’s unwarranted. We believe this combination might not become a reality, as it would reduce competition in the pay-TV market.
Last week, AT&T dismissed the speculation that it is planning to sell its DIRECTV operations. AT&T COO John Stankey defended the company’s media strategy and told the Wall Street Journal that the company views DIRECTV “as central to its ambitions in streaming video.”
There have been reports that AT&T might sell or spin off its pay-TV business unit, DIRECTV. On September 18, the Wall Street Journal reported that AT&T was considering “various options, including a spinoff of DirecTV into a separate public company and a combination of DirecTV’s assets with Dish Network Corp., its satellite-TV rival.”
Elliott Management’s stake in AT&T
On September 9, Paul Singer’s Elliott Management hedge fund announced a $3.2 billion stake in AT&T. In its letter to AT&T’s board of directors, the investment firm criticized the telecom company’s media strategy. The investment firm also urged AT&T to divest non-core assets like DIRECTV and focus on its core telecommunications business.
Elliott Management believes that AT&T stock could be worth $60 per share by the end of 2021 if the telecom company follows its recommendations. The target price represents more than 58% upside potential from its closing price of $37.84 on Monday.
AT&&T’s pay-TV customer losses
In 2015, AT&T acquired DIRECTV for $67.1 billion, including net debt. Since then, the pay-TV provider has lost video subscribers due to cord-cutting. In the second quarter, AT&T lost 778,000 traditional video customers compared to 262,000 losses in the second quarter of 2018.
AT&T’s traditional video customer count fell 8.7% year-over-year to 21.6 million on June 30. In the third quarter, the telecom company is expected to lose about 1.1 million traditional video customers due to increased competition from over-the-top service providers like Netflix and Amazon Prime.
Comparatively, Charter Communications and Comcast lost 150,000 and 209,000 residential pay-TV customers in the second quarter, respectively.
DIRECTV–Dish merger might get regulatory approval
Analyst Craig Moffett of MoffettNathanson believes that antitrust regulators could approve the combination of pay-TV provider DIRECTV and Dish Network. According to FierceVideo’s September 30 report, Moffett wrote in a note to clients, “Satellite TV was growing by leaps and bounds at the time. Now it is in free fall. That alone may be enough to settle the debate; sure, two would be better than one, but both are credible bankruptcy risks on their own.”
Moffett’s note added, “They’d be a credible bankruptcy risk even together. Simply preserving an option for rural America at all would be the argument. And it would be a reasonably persuasive one.”
Moffett expects the merger to bring in synergies by combining ground facilities, SG&A expenses, and programming expenses. Moffett believes that “the biggest source of synergy would come from churn reduction. The firm estimates half of all satellite churn is back and forth between Dish and DirecTV.”
Share price movements
On Monday, AT&T stock rose 1.1% and closed at $37.84, while Dish Network stock rose 0.19% to $34.07. Year-to-date, AT&T has returned 32.6%. In comparison, Dish Network has risen nearly 36.4% year-to-date.
AT&T stock is trading 2.35% below its 52-week high and 41.19% above its 52-week low. Comparatively, Dish Network stock is trading 23.7% below its 52-week high and 46.73% above its 52-week low.
Fourteen of 28 analysts gave AT&T stock a “buy” rating. Thirteen analysts gave it a “hold,” and one gave it a “sell.” In comparison, seven of 18 analysts gave Dish Network stock a “buy” rating.