One day after DirecTV and Dish Network agreed to a long expected merger to combine the two embattled satellite giants, a major credit agency rating has cast cold water on some of the rationale behind the major deal.In a bulletin on Tuesday, S&P Global said it placed DirecTV, led by CEO Bill Morrow, on credit watch negative and warned of the secular trends of a “rapidly shrinking” linear TV industry and that expected cost efficiencies may not be enough to offset declines. “Credit metrics will deteriorate with higher debt. DTV will be assuming roughly $10 billion of Dish DBS’ debt at a multiple of about 3.5x EBITDA,” the credit rating agency noted.The two satellite rivals agreed to a deal unveiled on Sept. 30 that would see DirecTV owner AT&T sell its remaining 70 percent stake in the company to private equity firm TPG. DirecTV would then be merged with Dish Network owner Echostar, run by CEO Hamid Akhavan, in an acquisition priced at $1 plus the assumption of debt. The companies expect that if the deal goes through it would close in the fourth quarter of 2025. If combined, a DirecTV-Dish combo would have around 20 million paying TV subscribers.The companies say that this deal could provide about $1 billion in cost efficiencies per year. Even so, S&P Global wrote in its bulletin, that may not be enough. “We estimate that slightly less than 50 percent of U.S. households still subscribe to traditional linear TV, down from a peak of about 88 percent in 2010,” the credit rating agency wrote. “This resulted in DirecTV subscriber declines of 15 percent year over year in the second quarter of 2024, and we expect similar trends to continue to occur across the industry.”And about those synergies, the credit rating agency said there’s a risk for churn given the complications of migrating existing satellite subscribers to new plans. “We view these synergies as carrying greater execution risk than others due to the potential for customer disruption or churn,” the S&P wrote.As part of the spin off from AT&T to TPG, DirecTV will need to pay $2 billion to the telecom giant in 2025 and an estimated $7.6 billion through 2029, the companies said. Liontree is serving as financial advisor to DirectTV and TPG to get the deal to close.TPG partner John Flynn described the logic of the deal as allowing DirecTV to “be better able to invest in advancing the next generation of video services that benefit consumers and provide a broad diversity of programming.”In a pessimistic analyst note the day the deal close, a team at research firm Moffett Nathanson wrote, “Assuming the merger does get approved, getting it across the finish line is expected to take as long as two years. By then it is likely that the combined business will have shrunk by another 25 percent.”S&P Global added in its conclusion to the credit watch bulletin, “While having greater scale could allow DirecTV more negotiating leverage with programmers to help slow rate increases and possibly provide more flexibility around program packages, we believe it will be insufficient to counterbalance these competitive forces.”
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