AT&T Inc.'s DIRECTV business has shed millions of video subscribers in recent years, and reports suggest that AT&T is now ready to shed DIRECTV.

Citing people familiar with the matter, The Wall Street Journal reported that AT&T is considering selling some or all of its satellite TV business, having already held early-stage talks with several potential private-equity buyers such as Apollo Global Management Inc. and Platinum Equity. Speculation has also swirled for years that DIRECTV could combine with fellow satellite operator DISH Network Corp.

While analysts say AT&T would be better off without the burden of DIRECTV's declining satellite business, they warn any deal would be a tough sell.

The biggest hurdle to getting a deal done, according to MoffettNathanson pay TV analyst Craig Moffett, is valuation.

AT&T paid $49 billion for DIRECTV when it bought the company in 2015. But in the years since, the satellite business has dwindled. AT&T's video subscribers — which includes U-verse, DIRECTV and over-the-top video customers — fell to 18.4 million at the end of the June quarter, down from 25.4 million in June 2018. That equates to a loss of about 7 million subscribers over the course of two years.

"We do not expect the potential deal to be anywhere near the $49 billion AT&T paid for the business in 2015, with some sources saying the price could be under $20 billion," CFRA Research equity analyst Keith Snyder said in a research report.

Moffett, however, noted that AT&T would need a deal large enough to be positive for leverage targets. After operating leases, pension obligations and post-retirement health benefits, he estimates that AT&T is levered at close to 3.5x EBITDA.

"Any DirecTV sale at a multiple lower than their leverage ratio would make their leverage ratio worse, not better. That's simply not an option," Moffett said.

Thus, AT&T would be looking for a buyer to pay more than 3.5x EBITDA for DIRECTV, according to Moffett. While AT&T does not break out EBITDA directly for the satellite business, AT&T's entertainment group as a whole, including its wireline TV and broadband business, reported EBITDA of just over $10 billion in 2019.

Neil Begley, a Moody's senior vice president, agreed that the multiple for DIRECTV would need to be higher than 3.5x in order for the deal to be deleveraging, adding that AT&T would also have to use the proceeds from the transaction to pay down debt.

"There are two variables that are really important from a credit perspective: one is valuation, and two, use of proceeds," Begley said.

Moffett doubts any buyer — whether it is a private equity firm like Apollo or a strategic buyer like DISH — would be willing to pay such a price.

"No private equity buyer could assume an exit from the investment — an IPO, say, or a flip to someone else down the road — again because the rate of decline is so rapid," Moffett said, adding that a private equity buyer would plan to run the business for cash.

However, Tony Lenoir, an analyst with Kagan, a media research group within S&P Global Market Intelligence, sees a private equity buyer as "a good option." While satellite TV is increasingly becoming obsolete in the age of streaming, Lenoir said there will still be a market for DIRECTV services for years to come.

"It will be a niche market, and it could be a valuable one for nimble owners adept at zooming in on the right customers and cutting out the fat — something private equity excels at," Lenoir said.

As for DISH, the satellite operator is in the midst of building a next-generation 5G wireless network, a venture that is expected to cost upwards of $10 billion and to consume much of DISH's cash flow.

Still, when asked about a combination of DISH and DIRECTV during an August earnings call, DISH Chairman Charlie Ergen once again said he sees a combination of the two satellite companies as eventually "inevitable." But he said he has no idea whether that might be in a month or 10 years.

Moffett said the potential synergies from a DISH/DIRECTV combination would make any deal valuation for DIRECTV more attractive.

"But synergies would be limited by the fact that gross adds for the two companies have collapsed ... And programming synergies would likely be sharply limited by regulatory conditions," he said.

Notably, federal regulators in 2002 shot down a potential merger between DIRECTV and DISH, which at the time operated as EchoStar Communications.

Despite the obstacles to a deal, CFRA's Snyder said AT&T would be stronger without the "distraction" of DIRECTV.

"We see a potential sale as a positive for AT&T as DirecTV has been a drag on growth for a number of years as customer losses mount. In addition, the sale would free up a considerable amount of capital for debt reduction while also reducing capital expenditure requirements," Snyder said.

Begley said throughout his career, he has seen a number of companies in a similar position to AT&T, where one division or segment is in decline.

"It tends to cause a drag on the overall valuation of the company," the Moody's analyst noted.

AT&T shares are down more than 23% year-to-date as of market close Aug. 31, as compared to an 8% rise for the S&P 500 over the same period.

"Management is obviously trying to get the most for shareholders," Begley said. "I've seen lots of companies pursue spinoffs, sell-offs, or otherwise part with those businesses with the hopes that they would increase the valuation for their remaining businesses and drive the stock price up."

At least one AT&T shareholder, Elliott Management Corp., has already criticized the performance of DIRECTV under AT&T and suggested in September 2019 that the telco should consider divesting or spinning out DIRECTV, among other assets. AT&T executives at the time said the company had been assessing DIRECTV as part of an overall portfolio review.

Both AT&T and Elliott declined to comment to S&P Global Market Intelligence on the most recent sale rumors.