Note: AT&T will hold a call with investors
at 5 p.m. ET today. The webcast of the call and related materials
will be available on AT&T’s Investor Relations website at
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AT&T Inc.* (NYSE: T) and TPG Capital, the private equity
platform of global alternative asset firm TPG, announced today that
they have signed a definitive agreement under which the two parties
will establish a new company named DIRECTV (“New DIRECTV”) that
will own and operate AT&T’s U.S. video business unit consisting
of the DIRECTV, AT&T TV and U-verse video services.
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The transaction to separate AT&T’s U.S. video business into
New DIRECTV implies an enterprise value for the new company of
$16.25 billion.1 Under the terms of the transaction, New DIRECTV
will be jointly governed by a board with two representatives from
each of AT&T and TPG, as well as a fifth seat for the CEO,
which at closing will be Bill Morrow, CEO of AT&T’s U.S. video
unit. Following the close of the transaction, AT&T will own 70%
of the common equity and TPG will own 30%.
AT&T and TPG believe the new structure will provide greater
focus, flexibility and resources to best position the business to
succeed in the long term and deliver on its commitment to
customers, employees and shareholders. New DIRECTV will continue to
offer a competitive video service with best-in-class content.
“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. 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,” said AT&T CEO John Stankey. “As the pay-TV
industry continues to evolve, forming a new entity with TPG to
operate the U.S. video business separately provides the flexibility
and dedicated management focus needed to continue meeting the needs
of a high-quality customer base and managing the business for
profitability. TPG is the right partner for this transaction and
creating a new entity is the right way to structure and manage the
video business for optimum value creation.”
“Video remains a core service for tens of millions of
households. Since its launch in 1994, DIRECTV has continually
evolved its product, content and service to provide customers an
industry-leading video offering. 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 David Trujillo, Partner at TPG.
“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.”
Transaction terms
When the transaction closes, which is expected in the second
half of 2021, AT&T expects to receive from New DIRECTV $7.8
billion ($7.6 billion in cash and the assumption from AT&T of
$200 million of existing DIRECTV debt). AT&T expects to use the
proceeds from this transaction to reduce AT&T debt.
TPG will contribute $1.8 billion in cash to New DIRECTV in
exchange for preferred units and a 30% interest in common units of
New DIRECTV.
New DIRECTV has secured $6.2 billion in committed financing from
its bank group, $5.8 billion of which is expected to be paid to
AT&T in cash plus the assumption from AT&T of $200 million
of existing DIRECTV debt.
AT&T will contribute its U.S. video business unit to the new
entity in exchange for preferred units as well as a 70% interest in
the common units of New DIRECTV.
Since AT&T closed the DIRECTV acquisition in 2015, the
business has generated cash flows of more than $4 billion per year,
and the company expects this to continue in 2021.
New DIRECTV’s CEO Morrow joined AT&T in 2019 to oversee the
company’s operational transformation efforts. Morrow’s career
includes successfully leading operational transformations of
telecom and utility companies, including serving as CEO of Vodafone
Hutchison Australia, Vodafone Europe and Pacific Gas &
Electric. Morrow and a management team approved by AT&T and TPG
will oversee the day-to-day operations of New DIRECTV, and Morrow
will report to the New DIRECTV board.
AT&T-TPG
For more than a decade, TPG has been engaged in the evolving
landscape of content creation, distribution and consumption, giving
it a unique window into consumer preferences that will inform
efforts to continue to improve New DIRECTV’s video service to
better meet customer needs. The firm has a long history of
partnering with corporate owners to invest in and carve-out
non-core businesses, providing the capital and operational
expertise to uncover new value and execute on long-term growth
objectives.
“We look forward to working with AT&T, Bill and the entire
talented team at the new DIRECTV to create a seamless customer
experience through the separation of the company,” John Flynn,
Principal at TPG said. “We are particularly excited by the
opportunity to grow new DIRECTV’s streaming video service,
leveraging the company’s leading pay-TV platform, talented labor
force and large subscriber base to transition it into a leading
next-generation video provider with best-in-class content and
customer experience.”
Coupled with extensive experience in the video and content
business, TPG is committed to ensuring that New DIRECTV’s valuable
airwaves continue to serve a public benefit by continuing to
provide high-quality satellite video service to consumers across
the country.
After close, New DIRECTV will have a commercial agreement with
AT&T to continue to offer bundled pay-TV service for AT&T’s
wireless and internet customers. Additionally, AT&T and New
DIRECTV will have commercial agreements in place that will give New
DIRECTV video subscribers continued access to HBO Max; allow both
companies to serve customers through multiple distribution
channels, including retail, online, call centers and indirect
sellers; and share revenues for ad inventory management and ad
sales.
Background on U.S. video business
AT&T has seen improvement in its domestic video business in
recent quarters. It hit its peak level of subscriber losses in
2019, and through the fourth quarter of 2020, premium video net
losses had improved sequentially for five straight quarters.2
AT&T’s video subscriber churn has also continued to improve,
and premium TV ARPU increased 5.1% in the fourth quarter of
2020.
In 2020, AT&T’s video services advanced from #3 to #1 in
J.D. Power’s 2020 Residential Television Customer Satisfaction
Study. This was driven in part by solid performance from AT&T
TV — the company’s streaming pay-TV platform which launched in
early 2020. AT&T TV offers the best of live and on-demand
content and has lower subscriber acquisition costs driven by
customer self-installation.
AT&T’s U.S. video unit had approximately 17.2 million
subscribers as of the end of 2020. For full-year 2020, the unit had
more than $28 billion in revenues, operating income of $1.7
billion, operating income margins of 6%, $4 billion in EBITDA and
EBITDA margins of about 14%.3
Seamless customer transition
Once the transaction is completed, existing AT&T video
subscribers will become New DIRECTV customers and will be able to
keep their video service and any bundled wireless or broadband
services, as well as HBO Max, plus any associated discounts.
When the transaction closes, all existing content deals,
including NFL SUNDAY TICKET on DIRECTV, will be a part of New
DIRECTV. Customers will continue to have access to premium content
via DIRECTV and AT&T TV and will receive the same services,
channel lineups and customer care experience. Customer account
information, online access and billing arrangements will remain the
same.
AT&T and TPG are committed to a smooth transition and
seamless customer experience and will work to further improve
customer service and bring new features to New DIRECTV’s video
services.
Continued commitment to employees
Until closing, all employees will operate business-as-usual.
When the transaction closes, it’s expected that substantially all
of the employees who support AT&T’s U.S. video operations today
will transition to New DIRECTV and the remainder will remain with
AT&T. New DIRECTV will recognize its unionized labor force and
will also assume and honor the existing collective bargaining
agreements covering union-represented employees and work with the
unions productively going forward. New DIRECTV will have
headquarters in El Segundo, Calif. and Denver.
“We have a talented team of employees in our video operations,”
said Bill Morrow, CEO-DIRECTV. “Their dedication and commitment to
this business will be key to New DIRECTV’s success as we work with
TPG to operate with renewed focus to deliver fantastic video
services and a superior customer experience.”
Morrow began his career with AT&T as a union-represented
field technician in California and has served as CEO of large
union-represented workforces.
Under a separate transition services agreement, AT&T will
for a period provide New DIRECTV with transition support services
such as IT, supply chain, sales & service, real estate, finance
and HR.
Among other items not included in New DIRECTV are AT&T’s
WarnerMedia HBO Max streaming platform, Vrio (AT&T’s Latin
American video operations), AT&T’s regional sports networks,
U-verse network assets and AT&T’s Sky Mexico investment.
AT&T financial impact
In 2021, AT&T expects to apply the cash proceeds from the
transaction toward debt reduction and does not expect a material
impact to its 2021 financial guidance for:
- Consolidated revenue growth in the 1% range
- Adjusted EPS to be stable with 20204
- Gross capital investment5 in the $21 billion range with capital
expenditures in the $18 billion range
- 2021 free cash flow6 in the $26 billion range, with a full-year
total dividend payout ratio in the high 50’s% range.7
Going forward, the company expects that the restructuring
enabled by this transaction will support improved future EBITDA
growth trajectory.
Following close of the transaction, AT&T expects to
deconsolidate the U.S. video operations from its consolidated
results.
AT&T continues to maintain a solid cash position and a
strong balance sheet. The company ended 2020 with about $10 billion
in cash on hand. In addition to the $7.6 billion in cash AT&T
expects to receive at the close of this transaction, the company
has secured $14.7 billion in financing via a term loan credit
agreement, the proceeds of which are available any time before May
29, 2021, and issued $6.1 billion of commercial paper in January
2021. The company also continues to identify opportunities to
monetize non-core assets, including its Crunchyroll anime unit,
which is pending sale for $1.175 billion.
In addition, the company has proactively managed its debt
portfolio, reducing near-term debt maturities by about $33 billion
in 2020 and lowering the overall portfolio average rate to 4.1% at
the end of 2020, down 20 basis points from first-quarter 2020
levels.
The transaction is subject to customary closing conditions and
to regulatory reviews.
Advisors
Goldman Sachs & Co. LLC acted as financial advisor to
AT&T and Sullivan and Cromwell LLP acted as legal advisor to
AT&T. Ropes and Gray provided legal advice to TPG and Credit
Suisse acted as lead financial advisor to TPG in connection with
the transaction. BofA Securities also acted as financial advisor to
TPG.
1 Includes debt and the elimination of up to $2.5 billion in NFL
SUNDAY TICKET net losses, which will be funded by AT&T.
2 Excludes the impact of Keep America Connected on third quarter
2020 net adds.
3 Our calculation of EBITDA, as presented, may differ from
similarly titled measures reported by other companies. EBITDA is
defined as segment operating contribution, excluding equity in net
income (loss) of affiliates and depreciation and amortization. We
believe EBITDA to be a relevant and useful measurement to our
investors as it is part of our internal management reporting and
planning processes, and it is an important metric that management
uses to evaluate operating performance. EBITDA does not give effect
to depreciation and amortization expenses incurred in operating
contribution nor is it burdened by cash used for debt service
requirements and thus does not reflect available funds for
distributions, reinvestment or other discretionary uses. EBITDA
margin is EBITDA divided by total revenue. For the year ended
December 31, 2020, our Video business unit operating contribution
was $1.7 billion and when adding back depreciation and amortization
expense of $2.3 billion, EBITDA was $4 billion. EBITDA divided by
$28.6 billion operating revenues of the Video business unit for the
year ended December 31, 2020 resulted in an EBITDA margin of
13.9%.
4The company expects adjustments to 2021 reported diluted EPS to
include merger-related amortization in the range of $4.3 billion
and other adjustments, a non-cash mark-to-market benefit plan
gain/loss, and other items. Expect the mark-to-market adjustment,
which is driven by interest rates and investment returns that are
not reasonably estimable at this time, to be a significant item.
Our 2021 EPS depends on future levels of revenues and expenses
which are not reasonably estimable at this time. Accordingly, we
cannot provide a reconciliation between our non-GAAP metrics and
the reported GAAP metrics without unreasonable effort.
5Gross capital investment includes capital expenditures and cash
payments for vendor financing and excludes FirstNet reimbursements.
In 2021, vendor financing payments are expected to be in the $2
billion range and FirstNet reimbursements are expected to be about
$1 billion.
6Free cash flow is cash from operating activities minus capital
expenditures. Due to high variability and difficulty in predicting
items that impact cash from operating activities and capital
expenditures, the company is not able to provide a reconciliation
between projected free cash flow and the most comparable GAAP
metric without unreasonable effort.
7 Free cash flow total dividend payout ratio is total dividends
paid divided by free cash flow. For full-year 2020, dividends paid
totaled $15.0 billion.
About TPG
TPG is a leading global alternative asset firm founded in 1992
with approximately $85 billion of assets under management and
offices in Austin, Beijing, Fort Worth, Hong Kong, London,
Luxembourg, Melbourne, Moscow, Mumbai, New York, San Francisco,
Seoul, Singapore, and Washington, DC. TPG's investment platforms
are across a wide range of asset classes, including private equity,
growth equity, real estate, and public equity. TPG aims to build
dynamic products and options for its investors while also
instituting discipline and operational excellence across the
investment strategy and performance of its portfolio. For more
information, visit www.tpg.com and on Twitter @TPG.
*About AT&T
AT&T Inc. (NYSE:T) is a diversified, global leader in
telecommunications, media and entertainment, and technology.
Consumers and businesses have more than 225 million monthly
subscriptions to our services. AT&T Communications provides
more than 100 million U.S. consumers with entertainment and
communications experiences across TV, mobile and broadband. Plus,
it serves high-speed, highly secure connectivity and smart
solutions to nearly 3 million business customers. WarnerMedia is a
leading media and entertainment company that creates and
distributes premium and popular content to global audiences through
its consumer brands, including: HBO, HBO Max, Warner Bros., TNT,
TBS, truTV, CNN, DC Entertainment, New Line, Cartoon Network, Adult
Swim and Turner Classic Movies. Xandr, now part of WarnerMedia,
provides marketers with innovative and relevant advertising
solutions for consumers around premium video content and digital
advertising through its platform. AT&T Latin America provides
pay-TV services across 10 countries and territories in Latin
America and the Caribbean and wireless services to consumers and
businesses in Mexico.
AT&T products and services are provided or offered by
subsidiaries and affiliates of AT&T Inc. under the AT&T
brand and not by AT&T Inc. Additional information is available
at about.att.com. © 2021 AT&T Intellectual Property. All rights
reserved. AT&T, the Globe logo and other marks are trademarks
and service marks of AT&T Intellectual Property and/or AT&T
affiliated companies. All other marks contained herein are the
property of their respective owners.
Cautionary Language Concerning Forward-Looking
Statements
Information set forth in this news release contains financial
estimates and other forward-looking statements that are subject to
risks and uncertainties, and actual results might differ
materially. A discussion of factors that may affect future results
is contained in AT&T’s filings with the Securities and Exchange
Commission. AT&T disclaims any obligation to update and revise
statements contained in this news release based on new information
or otherwise.
This news release may contain certain non-GAAP financial
measures. Reconciliations between the non-GAAP financial measures
and the GAAP financial measures are available on the company’s
website at https://investors.att.com.
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version on businesswire.com: https://www.businesswire.com/news/home/20210225006201/en/
For AT&T Fletcher Cook
214-912-8541 fletcher.cook@att.com Mike Flaherty 646-668-6852
mflaherty@gladstoneplace.com For
TPG Luke Barrett 415-743-1550 media@tpg.com Finsbury
Glover Hering Winnie Lerner 917-375-5652 winnie.lerner@fgh.com
Jeremy Pelofsky 202-425-4643 jeremy.pelofsky@fgh.com
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