DirecTV is AT&T Boss’s Ball And Chain

AT&T (T) Chief Executive Randall Stephenson is probably stuck with DirecTV. He paid $67 billion including debt for the satellite pay-TV provider in 2015, but it’s now worth much less. Even if Stephenson could stomach the hit to his reputation, ditching the asset will be a challenge.

The telecommunications group justified the purchase as a way to transform the video entertainment industry. Fast-forward four years, though, and DirecTV is bleeding subscribers. For the quarter ending June, it lost 778,000 customers – 3.5% of the total, and nearly triple the number shed in the same period last year. Its new internet-streaming product is losing subscribers too.

Meanwhile, the DirecTV deal spawned AT&T’s $109 billion acquisition of Time Warner, touted as another building block in what has turned out so far to be a questionable media strategy.

Activist investor Elliott Management has taken notice – and a stake – citing the poor performance of DirecTV. At the time of the deal, AT&T paid 7.7 times EBITDA. Assume the unit made about $6.1 billion by that measure for the 12 months ending June, or about 60% of EBITDA for AT&T’s entertainment division. On the same multiple AT&T originally paid, DirecTV is now worth about $47 billion.

Everything has a price, but selling a fading brand is particularly tough. A merger with Dish Network could make sense. The combination would offer cost savings, but probably not enough to justify a price close to what Stephenson paid – and anything much less would make his original deal look badly judged. Offloading DirecTV would also reduce the cash flow needed to fund AT&T’s hefty dividend.

With Dish, trustbusters would anyway have to take the same position that allowed the satellite-radio equivalents, Sirius and XM, to combine in 2008. And Charlie Ergen, the Dish co-founder and chair, is unpredictable and has his hands full planning to build out a fourth mobile network to counter T-Mobile US’s acquisition of Sprint.

Private equity may have some interest. Apollo Global Management might back an AT&T-controlled venture with DirecTV and Dish assets, according to a Fox Business report. That wouldn’t address the structural issue, however, namely the shrinking subscriber base. DirecTV would still be Stephenson’s ball and chain.