T AT&T Inc

By Drew FitzGerald and Miriam Gottfried 

AT&T Inc. agreed to sell a stake in its pay-TV unit to private-equity firm TPG and carve out the struggling business, pulling the telecom giant back from a costly wager on entertainment.

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

The deal values the new company at $16.25 billion with about $6.4 billion of debt. That is well below the $49 billion -- about $66 billion including debt -- that the Dallas company paid to buy international satellite operator DirecTV in 2015. AT&T recently struck $15.5 billion off the value of the unit, reflecting the service's dimmer prospects.

AT&T said it would get about $7.8 billion in cash from the transaction to help pay down debts. Those proceeds include $5.8 billion that the new company will borrow from banks and pay back to AT&T.

AT&T will be able to stop including results from its U.S. video operations in its consolidated financial reports. The telecom company also agreed to cover up to $2.5 billion in losses tied to DirecTV's NFL Sunday Ticket package.

Bidders including TPG and its rival Apollo Global Management Inc. had been jockeying for the business since The Wall Street Journal first reported on the sale process in August.

AT&T bought DirecTV near the peak of the pay-TV market, before cord-cutting upended the sector. Netflix Inc. had about 75 million subscribers world-wide, far below the more than 200 million subscribers it serves today. Cheap channel bundles costing $30 a month or less hadn't yet pierced the market.

"The disruption in pay TV did exceed our original expectations," AT&T finance chief John Stephens said in an interview, adding that the satellite-TV business had helped generate cash for the company even as its customer base declined. Mr. Stephens said the new ownership structure is "a very attractive transaction, getting TPG's expertise and that upfront cash payment."

AT&T said the new venture, to be called DirecTV and based in El Segundo, Calif., is expected to keep substantially all AT&T employees that currently work in the unit and that customers' service would not be affected. The unit had about $28 billion in revenue last year and 17.2 million customers.

The new business will be run by AT&T executive Bill Morrow, who has spent much of the past year leading a project to cut the broader telecom company's overall expenses. The new DirecTV will have five board members, two from each owner, in addition to Mr. Morrow.

TPG has experience with pay-TV investments. In November it said it 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 firm also has a history of carving assets out of big corporations 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 drugmaker Pfizer Inc.

TPG's investment in DirecTV will come in the form of senior preferred equity with a 10% cash coupon.

AT&T bought DirecTV more than five years ago and merged the business with its smaller cablelike TV service, turning the cellphone carrier into the country's biggest pay-TV purveyor overnight. It also saddled the company with a mountain of debt that grew larger after its purchase of entertainment producer Time Warner Inc. in 2018.

The two megadeals allowed AT&T to rival cable giant Comcast Corp. and its NBCUniversal division. But the business came together near the cusp of a "cord-cutting" trend that prompted millions of Americans to cancel their satellite and cable-TV service.

Write to Drew FitzGerald at andrew.fitzgerald@wsj.com and Miriam Gottfried at Miriam.Gottfried@wsj.com

(END) Dow Jones Newswires

February 25, 2021 18:10 ET (23:10 GMT)

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