AT&T will own 70% of the newly formed company’s equity.
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AT&T is spinning off its satellite and cable TV operations into a separate company and bringing on private-equity firm TPG Capital as a minority investor, it announced on Thursday.
The transaction will provide the telecom and media conglomerate with close to $8 billion in cash, which it says it will use to pay down debt. It values the combination of its DirecTV, AT&T TV, and U-verse pay-TV services at $16.25 billion, including debt. Customers shouldn’t see any change as a result of the transaction.
AT&T (ticker: T) will own 70% of the newly formed company’s equity, with TPG paying $1.8 billion for a 30% stake. AT&T and TPG will each get two seats on its board, with a fifth going to the new company’s CEO, Bill Morrow, who came to AT&T in 2019.
It’s the end of a turbulent chapter for AT&T’s video business: It paid $66 billion, including debt, for DirecTV alone in 2015, near the peak of the U.S. satellite TV business. In the fourth quarter of 2020, AT&T wrote down the value of its pay-TV segment by $15.5 billion. Subscribers have shed their cable and satellite TV bundles in favor of on-demand streaming services and moved to cheaper streaming live-TV packages.
The transaction is structured to heap $6.2 billion in new debt on the new DirecTV entity, with the cash going to AT&T. Add most of that to the $1.8 billion that TPG is putting in and AT&T will receive close to $8 billion, as well as holding on to an equity stake valued at $8.5 billion. Chief Financial Officer John Stephens said on an analyst call Thursday evening that the proceeds will be used to pay down AT&T’s debt.
AT&T’s video segment, which includes DirecTV, AT&T TV, and U-verse, had $28.6 billion in revenue last year, down 11%, and $1.7 billion in operating income, down 16%. It had 16.5 million combined subscribers, down by about 3 million in 2020.
CEO John Stankey said on the call Thursday that the move lines up with AT&T’s strategic priorities—that means 5G, fiber internet, and HBO Max.
“This agreement aligns with our investment and operational focus on connectivity and content, and the strategic businesses that are key to growing our customer relationships across 5G wireless, fiber and HBO Max,” Stankey said in an earlier statement. “And it supports our deliberate capital allocation commitment to invest in growth areas, sustain the dividend at current levels, focus on debt reduction and restructure or monetize non-core assets.”
“As video consumption habits evolve, the new DirecTV will continue investing in its offering to provide value to its customers, including through next-generation streaming pay-TV services,” said TPG partner David Trujillo in a statement Thursday. “TPG looks forward to partnering with AT&T and new DirecTV leadership to bring the right focus, attention, and execution in support of new DirecTV’s position as a competitive video provider for the benefit of its customers and employees.”
AT&T expects the transaction to close in the second half of this year. It doesn’t expect a material impact to its 2021 guidance as a result.
AT&T stock was up 0.3% in after-hours trading on Thursday, at $28.72, after falling 2.6% during the day. The S&P 500 closed down 2.5%.
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