AT&T spins out TV businesses in deal with TPG

New video services-focused company valued at $16.25 billion

AT&T has struck a deal with private equity firm TPG Capital to spin out thec carrier’s U.S. video services into a new company.

The “new DirecTV” will consist of AT&T’s video operations in the United States, including DirecTV, AT&T TV and U-verse video services. AT&T will own 70% of the new company’s common stock and receive a payment of $7.6 billion plus the assumption of $200 million in existing DirecTV debt.

TPG will contribute $1.8 billion in cash to the new company and receive preferred stock units and 30% of DirecTV’s common stock. In addition, AT&T and TPG said that the new company has lined up $6.2 billion in financing, of which $5.8 billion will be paid to AT&T.

The deal does not include the HBO Max streaming platform, AT&T’s regional sports networks, its Latin American video operations (Vrio) or Sky Mexico, or AT&T’s U-Verse network assets.

AT&T says it will use the proceeds from the transaction, which is expected to close in the second half of 2021, to reduce its debt. That comes as the company has committed to paying $23.407 billion in C Band spectrum purchases.

AT&T has also made no secret of its intent to reduce its debt by offloading non-core businesses and has made a number of those transactions recently. Last November, it closed on the $1.95 billion sale of its Puerto Rico and Virgin Islands operations; in October, it had finalized a deal to sell Central European Media Enterprises Ltd (which it has acquired as part of Time Warner) to investment group PPF in a cash deal valued at about $2.1 billion.

DirecTV has been publicly acknowledged to be a candidate for a partnership or other structure for some time.

AT&T and TPG said that 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.”

AT&T CEO John Stankey said in a statement that the deal “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.”

John Flynn, principal at TPG, said in a statement that the company is “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.”

DirecTV’s current CEO, Bill Morrow, will take the reins at the new DirecTV. The company’s board will consist of two seats each for AT&T and TPG, plus a seat for Morrow as CEO. AT&T and TPG will jointly approve a day-to-day management team. Morrow has been with A&T since 2019 and was previously CEO of Vodafone Hutchison Australia, Vodafone Europe and Pacific Gas & Electric.

AT&T said DirecTV has generated more than $4 billion a year in cash and that it expects this to hold in 2021; AT&T’s overall video business generated revenues of $28 billion and had 17.2 million subscribers as of the close of its full-year 2020 results. AT&T also noted that while DirecTV has struggled to maintain its customer base, those losses have improved for the last five quarters.

AT&T will still be leverage the various video services in its bundles. The carrier said that the new DirecTV will have a commercial agreement with AT&T to continue offering bundled TV services for AT&T’s wireless and internet customers, and that both companies will serve customers through multiple distribution channels; they will also have agreements in place to give the new company’s video customers continued access to HBO Max.

The new DirecTV will be headquartered in El Segundo, California and Denver, Colorado. In terms of workforce, the two partners said that “substantially all” of AT&T’s U.S. video operations employees will become part of the new DirecTV and that the new company will recognize, assume and honor the existing union contracts in place.

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