T AT&T Inc

By Shalini Ramachandran and Drew FitzGerald 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 19, 2019).

AT&T Inc. is exploring parting with its DirecTV unit, people familiar with the matter said, a sharp reversal from Chief Executive Randall Stephenson's strategy to make the $49 billion bet on the satellite provider a key piece of the phone giant's future.

The telecom giant has considered 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, the people said.

AT&T may ultimately decide to keep DirecTV in the fold. Despite the satellite service's struggles, as consumers drop their TV connections, it still contributes a sizable volume of cash flow and customer accounts to its parent.

AT&T acquired DirecTV in 2015 for $49 billion. The company's shrinking satellite business is under a microscope after activist investor Elliott Management Corp. disclosed a $3.2 billion stake in AT&T last week and released a report pushing for strategic changes. Elliott has told investors that AT&T should unload DirecTV, The Wall Street Journal has previously reported.

There could be regulatory hurdles to any deal with Dish, which has about 12 million subscribers. When Dish's predecessor EchoStar Communications Corp. and DirecTV's former owner Hughes Electronics Corp. tried to merge in 2001, regulators ultimately blocked it on antitrust grounds, worried that many rural Americans would be left with only a single option to get their television service. More recently, Dish Chairman Charlie Ergen held talks to combine with DirecTV in 2014, but lost out to AT&T.

On the idea of merging the two satellite providers, AT&T finance chief John Stephens said, "From a regulatory perspective, it hasn't been successful and I don't know that there is any change in that regulatory perspective." He added, speaking last week at an investor conference, "I understand the industrial logic, but quite frankly it's been tried and has been rejected."

Jettisoning DirecTV would be an about-face for Mr. Stephenson, who billed the acquisition of the company as a bold move to diversify beyond the wireless phone business and tap into a growing media industry. The deal made AT&T the largest distributor of pay TV channels, ahead of Comcast Corp. DirecTV is now part of an entertainment and consumer wireline unit that made up 27% of AT&T's $173.3 billion 2018 revenue.

AT&T executives have argued that DirecTV's millions of subscribers, combined with fiber-optic TV customers and cellphone users, give the telecom giant the scale it needs to compete with the likes of Netflix Inc. and Walt Disney Co. in entertainment and Alphabet Inc.'s Google in advertising.

Mr. Stephenson deepened AT&T's bet on media with the purchase last year of Time Warner Inc., after prevailing in an antitrust battle. He refused to have AT&T divest itself of DirecTV when the Justice Department suggested that as a condition of approving the deal. The government lost the case.

For Mr. Stephenson, who has helmed AT&T for 12 years, parting ways with DirecTV would be an acknowledgment that a major cornerstone of his diversification strategy hasn't gone as planned. It also adds pressure for AT&T to deliver on the promise of the Time Warner deal. Mr. Stephenson has signaled he is prepared to step down as CEO as soon as next year, the Journal reported last week.

This month, Mr. Stephenson elevated his longtime lieutenant John Stankey to become chief operating officer, a move that sparked Elliott's decision to go public with its grievances about AT&T's yearslong empire-building strategy. Mr. Stankey was put in charge of DirecTV after AT&T acquired it and later moved to head up WarnerMedia, the renamed Time Warner unit inside AT&T. He is widely viewed as the heir apparent for the CEO job. But Elliott viewed his recent promotion to COO as hasty, people familiar with the matter have said.

AT&T had 26 million U.S. pay-TV customers after it bought DirecTV, but subscribers have declined at a brisk pace as cord-cutting drives them to other entertainment options. Its pay-TV business, which includes satellite TV, fiber-optic video service and online channels, ended the second quarter with under 23 million customers. Mr. Stephens warned earlier this month at an investor conference that it would lose more customers in the third quarter.

AT&T's DirecTV disappointment follows a long line of ill-fated deals in media and communications, dating to AOL-Time Warner. AT&T's wireless rival, Verizon Communications Inc., has struggled to integrate media into its DNA as well. After spending more than $9 billion to acquire AOL and Yahoo, Verizon booked a $4.5 billion accounting charge related to its Oath media business last year, conceding that the company's bet on high-profile internet properties hasn't worked out.

In its letter to AT&T's board, Elliott said AT&T's DirecTV acquisition has come with "damaging results." The hedge fund criticized AT&T's glitch-filled launch of the DirecTV Now streaming service and questioned whether the numerous executive departures at DirecTV compounded AT&T's integration challenges. Elliott said that poor results at DirecTV "and general concern about the company's ability to execute" were obscuring stronger results at AT&T's core telecom businesses.

One reason AT&T may ultimately decide to keep DirecTV aboard is AT&T's towering net debt load, which stood at more than $160 billion earlier this year. The cash generated by the pay-TV giant has helped pay down that debt and fueled other investments in the rest of the company.

Any spinoff of DirecTV would be unlikely until mid-2020 at the earliest, five years after the deal closed, to make it a tax-efficient transaction for AT&T, a person familiar with the matter said.

Dish, which is also struggling in the pay-TV business, would be a logical partner for DirecTV. People close to Dish said there are obvious synergies that would come from combining both the national satellite-TV operators, including stronger leverage in programming negotiations, a single control center and shared customer-support operations. Dish also sees value in the cash that the satellite-TV business generates, which could help fund its diversification into wireless, the people said.

Speaking Tuesday at an investor conference in New York, Mr. Ergen said the question remains whether such a union would pass regulatory muster. "We look at everything," he said.

It is "a unique time in Washington D.C.," said AT&T's Mr. Stephens, the CFO. Federal agencies earlier this year said they will approve the merger of T-Mobile US Inc. and Sprint Corp., the third- and fourth-largest wireless carriers, but the deal is now being challenged by a coalition of state attorneys general. That merger also involves Dish, which stands to gain divested cellular assets if the T-Mobile-Sprint union survives the state challenge.

DirecTV's domestic and international operations operate as separate units. Last year, AT&T explored taking DirecTV's Latin American unit public but shelved the initial public offering amid tepid interest from investors.

Write to Shalini Ramachandran at shalini.ramachandran@wsj.com and Drew FitzGerald at andrew.fitzgerald@wsj.com

(END) Dow Jones Newswires

September 19, 2019 02:47 ET (06:47 GMT)

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