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., and Denver, is expected to keep substantially
all employees who currently support its U.S. operations and that
customers' service wouldn't be affected. The unit generated more
than $28 billion of revenue last year and had 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.
AT&T lost 7 million domestic pay-TV subscribers over the
last two years. Comcast lost about 2 million such customers over
the same period. Dish Network Corp., DirecTV's satellite-TV rival,
shed roughly 1 million subscribers.
The melting satellite business and the debt amassed to acquire
it has weighed on AT&T's stock in recent years. Activist hedge
fund Elliott Management challenged the company to cast off unneeded
business units and buy back stock, among other recommendations. The
company launched a formal sale process for the video unit after
longtime AT&T executive John Stankey became chief executive in
June.
Transferring some of the pay-TV unit's debt helps AT&T
whittle down its obligations, which could increase in the coming
months after the carrier agreed to spend $23.4 billion on wireless
spectrum licenses. A net debt load, which was listed above $180
billion after the Time Warner transaction, recently stood around
$148 billion.
Moody's Investors Service on Wednesday told clients that the
spectrum splurge could pressure 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 produce cash to help cover the spectrum costs.
AT&T's entertainment strategy now rests on the success of
HBO Max, a streaming service built atop the premium cable channel's
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.
HBO Max initially struggled to draw its existing customer base
away from subscriptions provided through partnerships with cable-TV
providers and device makers. Growth improved near the end of 2020
after executives forged deals with companies like Amazon and Roku
Inc.
The service also gained a flood of sign-ups by showing new film
releases from its sister studio Warner Bros. online the same day
they arrived in theaters. Mr. Stankey said the move, which upended
a Hollywood model in place for decades, was a temporary answer to
the box-office disruption the coronavirus pandemic caused. HBO Max
counted 17 million activated accounts at the end of December.
Write to Drew FitzGerald at andrew.fitzgerald@wsj.com and Miriam
Gottfried at Miriam.Gottfried@wsj.com
(END) Dow Jones Newswires
February 25, 2021 18:57 ET (23:57 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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