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AT&T INC.

(T)
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AT&T Carves Out Pay-TV Business in Deal With TPG -- 7th Update

02/25/2021 | 06:57pm EDT

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

02-25-21 1857ET

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Financials (USD)
Sales 2021 169 B - -
Net income 2021 17 723 M - -
Net Debt 2021 157 B - -
P/E ratio 2021 11,2x
Yield 2021 7,66%
Capitalization 194 B 194 B -
EV / Sales 2021 2,09x
EV / Sales 2022 2,22x
Nbr of Employees 230 760
Free-Float 93,6%
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Mean consensus HOLD
Number of Analysts 28
Last Close Price 27,21 $
Average target price 31,97 $
Spread / Average Target 17,5%
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Managers and Directors
John T. Stankey President, CEO, COO & Director
Pascal Desroches Chief Financial Officer & Senior Executive VP
William E. Kennard Independent Chairman
David S. Huntley Chief Compliance Officer & Senior Executive VP
Matthew K. Rose Lead Independent Director
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