The best mergers are when one company combines with another to create a business that’s worth more together than apart. Although they don’t often happen, rumors AT&T (NYSE:T) is considering merging its DirecTV satellite business with DISH Network (NASDAQ:DISH), its biggest satellite competitor, ought to be regarded as excellent news if you own T stock.
Here are three reasons AT&T ought to pursue this merger to its successful conclusion.
Reduce AT&T Debt
All we’ve read since AT&T gobbled up Time Warner is how much debt the company’s taken on to digest the media giant. I’ve written on several occasions why the added debt hurts T stock; my most recent article near the end of May discussed the problems I see with carrying so much debt.
“If the latter [AT&T] stock’s net debt was $168.9 billion in the most recent quarter or 71% of its market cap, and the former [Verizon] stock’s net debt was $111.3 billion or 45% of its market cap, the extra leverage of the latter’s stock makes the former a better value on a relative basis due to its superior balance sheet.”
AT&T paid $67.1 billion for DirecTV in 2015, which included the assumption of $18.6 billion in debt. DirecTV came with 20 million subscribers. Today, analysts project that DirecTV and DISH combined would have 29 million subscribers with a loss of 2.8 million in 2019 alone.
In 2015, to pay for part of the acquisition, AT&T issued $34 billion in debt compared to repaying $10 billion for a net addition of $24 billion.
By spinning off DirecTV, that debt would move on to the combined entity’s books, reducing AT&T’s overall debt by 14%.
That’s not bad for a business that’s in a secular decline.
Regulatory Environment is Good
It’s hard to imagine regulators would have given a DirecTV/DISH merger the green light in 2015 when AT&T bought the satellite company, but times have changed.
“The video market has changed meaningfully,” UBS analyst John Hodulik wrote June 7. “In 2002, “internet TV was in its infancy (YouTube founded in 2005), social media non-existent and MVPDs were enjoying robust growth.”
AT&T has to do something to reduce its debt. Spinning off a deteriorating asset into a combined, stronger entity would be not unlike when Sirius and XM Radio merged.
Determining who would control the combined business is ultimately going to be the deal maker/breaker. If I were CEO Randall Stephenson, I would willingly give up control if it meant the combined business could be run by DISH, recognized for its far-superior customer service.
AT&T Can Focus on Streaming
WarnerMedia CEO John Stankey wants its yet-to-be-launched streaming service to attract 70 million subscribers, who’d pay between $15 and $18 a month for a subscription-only service that would include HBO, Cinemax, and Warner Bros. movies and TV shows.
Considering HBO Now charges $14.99 and HBO Go has access to 35 million pay-TV customers, getting to 70 million shouldn’t be very difficult.
As my InvestorPlace colleague, Josh Enomoto recently wrote: “I’m licking my lips at where the AT&T stock price can ultimately go. Viewers are obviously not chasing the streaming platform for platform’s sake. Instead, they’re very much chasing the content.”
I might not like AT&T’s level of debt, but the content it has to launch a first-rate streaming service to compete with Disney (NYSE:DIS) and Netflix (NASDAQ:NFLX) makes the acquisition of WarnerMedia slightly more palatable.
By getting rid of DirecTV, it can focus on getting streaming right.
Bottom Line on T Stock
I probably wouldn’t own AT&T stock but the spinoff of DirecTV would go a long way toward changing my mind.
If you own T stock, be very hopeful that negotiations get going.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
More From InvestorPlace
4 Top American Penny Pot Stocks (Buy Before June 21)
7 Stocks to Buy As They Hit 52-Week Lows
4 Antitrust Tech Stocks to Keep an Eye On
5 Gold and Silver Stocks Touching Intraday Highs
The post Here Are 3 Reasons Why Spinning Off DirecTV Would Help AT&T Stock appeared first on InvestorPlace.