DirecTV is going for negative credit in the wake of the Dish Network merger

DirecTV was placed on negative credit rating by ratings agencies S&P Global and Fitch after the company announced it would merge with Dish Network in a deal worth $1 billion and $9.75 billion in debt that is expected to close in late 2025.

The firms said the move reflects the loss of some governance protections as TPG buys out AT&T’s remaining 70 percent stake in the company, giving the private equity firm full ownership of the combined company.

“The acquisition provides material immediate benefits such as increased scale and significant synergies that are credit positive in the short to medium term,” Fitch wrote on Monday. “However, Fitch expects ratings to be pressured by long-term challenges in the industry, including declining satellite pay-TV subscribers and declining revenue trends.”

S&P also noted that the pay-TV model has been under pressure as programming providers increase rates and move their best content from linear to streaming, as distributors have limited flexibility to create tailored channel lineups to meet minimum penetration requirements meet, and as YouTube TV gains significant market share. It noted that DirecTV experienced a 15% year-over-year decline in subscribers in the second quarter of 2024 and that similar trends are expected across the industry.

“While greater size could provide DirecTV with greater negotiating leverage with programmers to slow rate increases and potentially provide more flexibility in programming packages, we believe this will not be sufficient to offset these competitive forces,” it continued.

Fitch expects total company revenues to decline by a high-single-digit to low-double-digit range in 2024 and 2025, primarily due to declines in pay-TV satellite subscribers and U-Verse subscribers, driven in part by higher average revenues per month Users are balanced.

Meanwhile, S&P warned that credit metrics would deteriorate with the higher debt, warning that DirecTV “will assume approximately $10 billion of Dish DBS’s debt at a multiple of approximately 3.5 times EBITDA.” The combined company’s debt-to-EBITDA ratio is expected to increase to 2.7x in 2025, up from approximately 1.4x in the last 12 months and 2.9x in 2026 continued loss of subscribers. However, by reducing debt and realizing cost synergies, this will improve to 2.3 times by 2027, it said.

DirecTV said it expects cost synergies of at least $1 billion per year to be achieved by the third anniversary of the deal. The company has also said it will have a debt position of just over two times and plans to reduce this to under two within 12 months.

S&P estimates that net synergies could be at least $1 billion by 2029, representing about 15% of Dish’s total operating costs, but notes that the realization of these synergies would occur gradually over three to four years, starting at about $400 million in 2026.

Available synergies include reduced content spending due to pricing differences and future negotiations with programmers; the elimination of duplicate overhead costs such as corporate positions in the field, call centers, and sales; the consolidation of streaming platforms and the migration of Denver systems to DirecTV; and eliminating friction that S&P says is caused by customers switching between the two satellite TV giants.

Looking forward, Fitch forecasts DirecTV’s EBITDA margins will increase to mid-to-high 20% in 2026 and 2027, supported by acquisition synergies and free cash flow after tax distributions of between $2 billion and $2.5 billion per Year.

S&P expects EBITDA margin to remain at or above 25% through 2028 due to the operational efficiencies enabled by the merger. It added that the company’s free operating cash flow to debt ratio would temporarily fall below 15% in 2026 before rising to about 17% in 2027.

Once the acquisition is complete, the companies will remove their negative credit monitoring and downgrade the company’s ratings. In the event the deal falls through, Fitch would downgrade the company due to continued revenue and EBITDA declines and increase leverage to more than three times without a credible deleveraging plan or more aggressive financial policy. While the company does not expect any improvement in the near term, it said it will do so if the company can successfully implement initiatives to return to revenue and EBITDA growth and leverage below 2x.

Shares of Dish parent EchoStar fell about 3% at Tuesday’s close, while shares of AT&T edged up 0.66%.