AT&T sells part of DirecTV to buyout company TPG

AT&T Inc. has agreed to sell a stake in its pay-TV unit to private equity firm TPG and part ways with the ailing company, pulling the telecommunications giant out of a costly gamble on entertainment.

The transaction would move the DirecTV and AT&T TV services to the United States into a new entity that will be jointly managed by the new partners. AT&T will retain a 70% stake in the company. TPG will pay $ 1.8 billion in cash for a 30% stake.

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The deal values ​​the new company at $ 16.25 billion with around $ 6.4 billion in debt. That’s well below the $ 49 billion – roughly $ 66 billion including debt – the Dallas-based company paid to buy international satellite operator DirecTV in 2015. AT&T recently deducted $ 15.5 billion unit value, reflecting the weaker outlook for the service.

AT&T said it would get about $ 7.8 billion in cash from the transaction to help pay off debts. These products include $ 5.8 billion that the new company will borrow from banks and repay AT&T.

AT&T may discontinue including the results of its video operations in the United States in its consolidated financial reports. The telecommunications company has also agreed to cover up to $ 2.5 billion in losses related to DirecTV’s NFL Sunday Ticket package.

Bidders, including TPG and rival Apollo Global Management Inc., have been fighting for the company since the Wall Street Journal reported on the sale process in August.

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AT&T bought DirecTV near the top of the pay-TV market, before the cord cut shocked the industry. Netflix Inc. had around 75 million subscribers worldwide, well below the more than 200 million subscribers it serves today. Inexpensive channel bundles costing $ 30 a month or less had yet to break into the market.

“The pay-TV disruption has exceeded our initial expectations,” AT&T CFO John Stephens said in an interview, adding that the satellite TV business had helped generate cash for the company. business even as its clientele was shrinking. Mr. Stephens said the new ownership structure is “a very interesting transaction, which benefits from the expertise of TPG and this upfront cash payment”.

Teleprinter	security	Latest	Change	Change%
T	AT&T INC.	28.64	-0.77	-2.62%

AT&T said the new company, called DirecTV and based in El Segundo, Calif., Is expected to retain virtually all of the AT&T employees currently working in the unit and customer service will not be affected. The unit achieved approximately $ 28 billion in revenue last year and 17.2 million customers.

The new company will be led by AT&T executive Bill Morrow, who has spent much of the last year leading a project to cut overall spending at the telecommunications company. The new DirecTV will have five board members, two from each owner, in addition to Mr. Morrow.

TPG has experience with investing in pay television. In November, he announced that he would sell Astound Broadband, the operator of cable brands, including RCN, for $ 8.1 billion, including debt. Its media and entertainment investments include Spotify Technology SA, talent agency CAA, and payroll services company Entertainment Partners.

The buyout company also has a habit of diverting assets from large companies and partnering with their owners to improve them. In 2016, TPG bought a 51% stake in cybersecurity software provider McAfee LLC from Intel Corp., and in 2018, it took a stake in Allogene Therapeutics Inc., then a unit of drug maker Pfizer Inc. .

TPG’s investment in DirecTV will be in the form of senior preferred shares with a 10% cash coupon.

AT&T bought DirecTV over five years ago and merged the company with its smaller cable TV service, making the mobile carrier the country’s largest pay-TV provider overnight. It also cornered the business of a mountain of debt that grew after its purchase from entertainment producer Time Warner Inc. in 2018.

The two mega-seals helped AT&T compete with cable giant Comcast Corp. and its NBCUniversal division. But the company has come together on the threshold of a “cord cut” trend that has led millions of Americans to cancel their satellite and cable TV service.

AT&T has lost 7 million domestic pay-TV subscribers in the past two years. Comcast lost about 2 million of these customers during the same period. Dish Network Corp., the satellite television rival of DirecTV, has lost about 1 million subscribers.

Satellite merger activity and the debt accumulated to acquire it have weighed on AT & T’s stock in recent years. Activist hedge fund Elliott Management challenged the company to get rid of unnecessary business units and buy back shares, among other recommendations. The company has launched a formal sales process for the video unit after longtime AT&T executive John Stankey took over as managing director in June.

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The transfer of some of the pay-TV unit’s debt helps AT&T reduce its obligations, which could rise in the months to come after the carrier agreed to spend $ 23.4 billion on spectrum licenses without thread. Net debt, which exceeded $ 180 billion after the Time Warner transaction, was recently around $ 148 billion.

Moody’s Investors Service told clients on Wednesday that specter madness could put pressure on AT & T’s credit rating, which sits two steps above junk territory. In a brief note Thursday, Moody’s called the DirecTV deal “moderately credit positive” because it would generate liquidity to help cover spectrum costs.

AT & T’s entertainment strategy now rests on the success of HBO Max, a streaming service built on top of the premium cable channel brand. The service launched in May 2020, entering a crowded field of similar services from Netflix Inc., Amazon.com Inc., and Walt Disney Co., among others.

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HBO Max initially struggled to move its existing customer base away from subscriptions provided through partnerships with cable TV providers and device manufacturers. Growth improved towards the end of 2020 after executives struck deals with companies like Amazon and Roku Inc.

The service has also gained a large number of registrations by showing new movie releases online from its sister studio Warner Bros. the very day of their arrival in theaters. Mr Stankey said the move, which has shaken an established Hollywood model for decades, was a temporary response to the box office disruption caused by the coronavirus pandemic. HBO Max had 17 million activated accounts at the end of December