AT&T (NYSE:T) is mulling over the potential sale of its pay TV business in Latin America, according to a Reuters report citing "people familiar with the matter." The unit provides satellite TV services in Brazil, Colombia, Venezuela, Argentina, and several other countries. AT&T doesn't plan to sell its pay TV business in Mexico, which it gained from its acquisition of DirecTV in 2015.
The sale of the Latin America business could fetch over $8 billion, and potential suitors include international telco Liberty Global PLC, Latin American wireless carrier Millicom International Cellular, and Spanish telco Telefonica (NYSE:TEF). Telefonica previously expressed interest in buying the business in early 2016.
Why would AT&T sell its Latin American business?
AT&T's primary reason for selling the business would be to reduce its debt. It finished last quarter with $132.8 billion in long-term debt, mainly due to its purchases of DirecTV and AWS-3 Spectrum licenses. $10.8 billion of that total matures within a year.
Its upcoming $85.4 billion purchase of Time Warner (NYSE:TWX) -- which will be made with stock and cash -- could push its long-term debt above $180 billion. That's a lot of debt for a company which generated $15.8 billion in free cash flow over the past 12 months. $8 billion might not seem like much compared to its total debt, but it would be a step in the right direction.
Another likely factor is the instability of the governments, economies, and currencies across Latin America. Those problems can mostly be attributed to an over-dependence on the oil industry and corruption scandals in major economies like Brazil, Argentina, and Venezuela. Therefore, weakening currencies and consumer purchasing power could be toxic for the business.
But would a sale be premature?
However, several signs indicate that it's the wrong time for AT&T to sell the Latin American unit. When Telefonica expressed interest in the business last January, analysts valued the deal at $10 billion. The recent 20% reduction to the value was likely due to the economic turbulence across Latin America.
But many of those markets, with the exception of Venezuela, are gradually stabilizing as oil prices firm up. The IMF expects the Latin American region's GDP to return to growth this year and accelerate in 2018 -- so it might be wise for AT&T to postpone the sale.
Furthermore, the Latin American unit is still growing. Its total satellite subscribers rose 8.8% annually to 13.6 million during the second quarter, revenues grew 11% to $1.36 billion (3% of AT&T's top line), and EBITDA surged 49% to $363 million.
During that period, its EBITDA margin expanded from 20% to 26.7%. The unit's sequential growth in subscribers is notably decelerating (turning slightly negative at SKY Brazil last quarter), but its overall growth remains strong.
Could AT&T sell other assets instead?
The Latin American business isn't the only unit that might be sold. AT&T is also considering the sale of its Digital Life home security business, but analysts estimate that deal would only net about $1 billion.
AT&T already sold many other assets -- including its data centers for $2 billion, wireline operations for $2 billion, and cell towers (in a partial lease) for nearly $5 billion -- to streamline its business around its wireless and pay TV businesses.
By buying Time Warner, AT&T would enhance that ecosystem with media assets which could help it counter streaming rivals like Netflix. But dramatically changing the business this way comes at a high price for AT&T.
With the Latin American unit, AT&T needs to decide which matters more -- taming its soaring debt levels or letting the business grow. I personally think it's premature for AT&T to sell the Latin American business, but that might be the cost of closing the Time Warner deal.
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