In the culmination of a process that had been going on for much of the last year, AT&T finally announced late last week that it had reached agreement to sell a stake in its DirecTV unit to the private equity firm TPG.
The deal works like this: TPG agreed to pay AT&T $16.25 billion. The result is the creation of a separate business entity, which will be called DirecTV, or “New DIRECTV,” which will consist of the entirety of what used to be AT&T’s video business, which also includes AT&T U-Verse and AT&T TV.
AT&T will control 70 percent of “New DirecTV,” while TPG will own the remaining 30 percent.
“Under the terms of the transaction, New DIRECTV will be jointly governed by a board with two representatives from each of AT&T and TPG, as well as a fifth seat for the CEO, which at closing will be Bill Morrow, CEO of AT&T’s U.S. video unit,” AT&T added in the press release.
The deal is expected to close in the second half of 2021.
AT&T also said that it “expects to receive from New DIRECTV $7.8 billion ($7.6 billion in cash and the assumption from AT&T of $200 million of existing DIRECTV debt)—money which AT&T “expects to use the proceeds from this transaction to reduce AT&T debt.” Meanwhile, TPG will pay $1.8 billion in cash to New DirecTV.
“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,” AT&T CEO John Stankey said in the announcement.
“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.”
“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,” John Flynn, Principal at TPG said in the announcement. “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.”
The deal comes less than five years after AT&T agreed to pay $49 million—or $67.1 billion, including resumption of debt—to acquire the satellite TV service. But in the years since, AT&T’s business priorities have changed, especially with the acquisition of WarnerMedia. Meanwhile, the satellite TV business has seriously declined.
AT&T’s video business, which includes DirecTV, lost 617,000 video subscribers in the fourth quarter of 2020, after it lost 590,000 in the third quarter. The company’s losses in the first half of the year were even steeper.
For much of the past year, AT&T had reportedly been in talks with various parties about selling off a stake the DirecTV unit. Apollo Capital Management had been mentioned as a possible suitor for much of the time the talks were ongoing, but the firm ultimately didn’t win the bidding.
What does the deal mean for current subscribers to DirecTV and the other pay TV services? That’s unclear at this point. The deal means that those services will continue to exist for the foreseeable future, and it’s likely too early to tell what the change will mean for pricing.
It is clear, though, that rise of cord cutting helped bring about the ultimate sale of DirecTV.
“The percentage of users only subscribing to pay-TV took a dive from 36% to 14%, while the percentage of users only subscribing to OTT services skyrocketed from 11% to 23%,” Parks Associates said in a report following the announcement of the deal. “The low introductory prices ($4.99, $6.99) of streaming services, along with the option for free trials, continue to upend more expensive broadcast packages as households search for cost efficient video options. Financial concerns raised by COVID-19 have only amplified this trend as the future of the market.”
“Pay-TV is no longer the fixture that tops the video hierarchy, and AT&T’s deal indicates that the company sees the prospects of paying off its accused debts as more valuable than an attempt to salvage its pay-TV arm,” Parks also said. “Rival providers will be under similar pressure from their stakeholders to either streamline their offerings or generate renewed viewer interest in their legacy models.”
Meanwhile, Sportico reported that the sale of the DirecTV stake likely means that a split between DirecTV and the NFL Sunday Ticket package is likely next. Sportico cited a line in the announcement referring to the valuation including “elimination of up to $2.5 billion in NFL Sunday Ticket net losses,” while adding that DirecTV will continue to honor its deal with the NFL through the end of the 2022 season.
It’s been strongly implied that Amazon is the favorite to take over the Sunday Ticket package once the DirecTV deal is over, but no such determination is likely to be reached soon.
Stephen Silver, a technology writer for The National Interest, is a journalist, essayist and film critic, who is also a contributor to The Philadelphia Inquirer, Philly Voice, Philadelphia Weekly, the Jewish Telegraphic Agency, Living Life Fearless, Backstage magazine, Broad Street Review and Splice Today. The co-founder of the Philadelphia Film Critics Circle, Stephen lives in suburban Philadelphia with his wife and two sons. Follow him on Twitter at @StephenSilver.