Q. I saw that AT&T just took a $15 billion write down on DIRECTV. What does that mean? Is it a tax thing? Or does it have something to do with selling it? I’m not a finance person so I am confused by this. Can you explain it? — Gene, Gaithersburg, Maryland.
Gene, the answer is that it could be a little of both. Let me explain.
AT&T yesterday revealed that it took a $15.5 billion charge on DIRECTV in the fourth quarter, which means it reduced the financial value of the satellite TV service. The reason why is obvious: DIRECTV has lost more than six million subscribers since AT&T purchased it in 2015 for $49 billion. There’s no way that DIRECTV is worth anything close to $49 billion now. The $15.5 billion write down basically represents the difference between DIRECTV’s previous value and what AT&T could now get for it if it sold it. The reduction in value makes DIRECTV what is known in accounting as an “impaired asset.”
When a company decides to write down the value of an asset, it’s a sign that it does not believe its performance will improve anytime soon, if ever. And that is certainly the case here. AT&T has said repeatedly that DIRECTV, and the satellite TV industry, is in decline and is unlikely to ever return to its glory days.
By writing down DIRECTV by $15.5 billion, AT&T accomplishes two things.
One, the reduction in value can be regarded as an expense in AT&T’s profit and loss statement. This reduced the company’s profits in the fourth quarter, which also reduced its tax liability.
Two, a corporate write down creates a more accurate value for an asset, which is important to any company looking to invest in that corporation, or to be more precise, invest in its satellite TV service. Reuters and Bloomberg reported last week that AT&T is negotiating exclusively with equity firm TPG to purchase a minority or majority stake in DIRECTV. The news reports said a deal could be close so the write down is likely connected in part to the likelihood of a sale.
It remains to be seen if AT&T does sell all or part of DIRECTV in the coming weeks. But yesterday’s news that AT&T has officially reduced DIRECTV’s value is another sign that the company has turned the page on its satellite TV service. There is no longer any pretense that DIRECTV can dominate the pay TV scene.
“I mean, you all know about the declines in the pay TV lifecycle,” AT&T CEO John Stankey told financial analysts yesterday in a conference call following the release of the company’s fourth quarter which showed more subscriber losses for DIRECTV. “Getting the management team really focused on what to do in the latter stages of the lifecycle of a mature product and ensuring that we manage it effectively, I think, is the wise thing to do for that product on a standalone basis. And that’s one driver behind why we made that decision (the write down).”
Gene, hope that helps. Happy viewing, and stay safe!
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