The sides have been in talks for months as AT&T has sought to find a solution to the problem of DirecTV’s subscriber losses dragging down the company’s overall results. The pact with TPG implies an enterprise value of $16.25 billion, a far cry from the $48.5 billion that AT&T paid for DirecTV in 2015. AT&T will own the remaining 70% of the new entity.
The deal covers DirecTV, AT&T TV and AT&T’s smaller U-verse MVPD service. The new company, to be named DirecTV, will be headed by Bill Morrow, who is CEO of AT&T’s U.S. video series. The new-model DirecTV will be governed by a board of five seats, two for AT&T, two from TPG Capital and one for Morrow.
“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.”
DirecTV notched a net loss of 617,000 subscribers in the fourth quarter, bringing its subscriber base to a total of 16.5 million; AT&T’s . The company has seen a steady subscriber decline for more than two years although AT&T noted that its sequential decline has improved over the past five quarters.
AT&T has some video assets that are not included in the deal, including its Latin American video operations, regional sports networks, U-verse network assets and AT&T’s Sky Mexico investment. None of WarnerMedia’s assets, including HBO Max, are part of the transaction. AT&T has also committed to absorbing $2.5 billion in net losses from the “NFL Sunday Ticket” package — the premium channel that allows subscribers to watch any NFL game being played that day. “Sunday Ticket” is known to have been a loss leader for DirecTV.
All told, AT&T will get $7.6 billion in cash from the newly created DirecTV entity, and the private equity giant will assume another $200 million in existing AT&T debt. TPG will contribute $1.8 billion in cash in exchange for preferred stock in the venture. New DirecTV has financing commitments of $6.2 billion, of which $5.8 billion will be paid to AT&T in cash.
“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,” TPG principal John Flynn 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.”
Morrow joined AT&T in 2019 with a charter to turnaround the company’s fortunes. He’d previously handled similar assignments with Vodafone Australia, Vodafone Europe and Pacific Gas and Electric.
AT&T said it would use the cash proceeds from the sale to pay down debt.
The sides can terminate the deal if it is not concluded by Nov. 25 although that deadline may be extended to May 25, 2022, per AT&T’s Securities and Exchange Commission filing.