AT&T Spins Off U.S. Video
Unit in $16B Deal|
February 26, 2021
AT&Tand TPG Capital have signed
a definitive agreement under which the two parties will establish a new
company named DIRECTV that will own and operate AT&T’s
U.S. video business unit consisting of the DIRECTV, AT&T TV and U-verse
The transaction to separate AT&T’s U.S. video business into New DIRECTV
implies an enterprise value for the new company of $16.25 billion.1
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. Following the close of the transaction, AT&T
will own 70% of the common equity and TPG will own 30%.
AT&T and TPG believe 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. New DIRECTV will continue to offer a competitive video
service with best-in-class content.
“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.”
“Video remains a core service for tens of millions of households. Since
its launch in 1994, DIRECTV has continually evolved its product, content
and service to provide customers an industry-leading video offering. As
video consumption habits evolve, the new DIRECTV will continue investing
in its offering to provide value to its customers, including through
next-generation streaming pay-TV services,” said David Trujillo, Partner
at TPG. “TPG looks forward to partnering with AT&T and new DIRECTV
leadership to bring the right focus, attention and execution in support
of new DIRECTV’s position as a competitive video provider for the
benefit of its customers and employees.”
When the transaction closes, which is expected in the second half of
2021, AT&T 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). AT&T expects to use the proceeds from this transaction to
reduce AT&T debt.
TPG will contribute $1.8 billion in cash to New DIRECTV in exchange for
preferred units and a 30% interest in common units of New DIRECTV.
New DIRECTV has secured $6.2 billion in committed financing from its
bank group, $5.8 billion of which is expected to be paid to AT&T in cash
plus the assumption from AT&T of $200 million of existing DIRECTV debt.
AT&T will contribute its U.S. video business unit to the new entity in
exchange for preferred units as well as a 70% interest in the common
units of New DIRECTV.
Since AT&T closed the DIRECTV acquisition in 2015, the business has
generated cash flows of more than $4 billion per year, and the company
expects this to continue in 2021.
New DIRECTV’s CEO Morrow joined AT&T in 2019 to oversee the company’s
operational transformation efforts. Morrow’s career includes
successfully leading operational transformations of telecom and utility
companies, including serving as CEO of Vodafone Hutchison Australia,
Vodafone Europe and Pacific Gas & Electric. Morrow and a management team
approved by AT&T and TPG will oversee the day-to-day operations of New
DIRECTV, and Morrow will report to the New DIRECTV board.
For more than a decade, TPG has been engaged in the evolving landscape
of content creation, distribution and consumption, giving it a unique
window into consumer preferences that will inform efforts to continue to
improve New DIRECTV’s video service to better meet customer needs. The
firm has a long history of partnering with corporate owners to invest in
and carve-out non-core businesses, providing the capital and operational
expertise to uncover new value and execute on long-term growth
“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. “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
Coupled with extensive experience in the video and content business, TPG
is committed to ensuring that New DIRECTV’s valuable airwaves continue
to serve a public benefit by continuing to provide high-quality
satellite video service to consumers across the country.
After close, New DIRECTV will have a commercial agreement with AT&T to
continue to offer bundled pay-TV service for AT&T’s wireless and
internet customers. Additionally, AT&T and New DIRECTV will have
commercial agreements in place that will give New DIRECTV video
subscribers continued access to HBO Max; allow both companies to serve
customers through multiple distribution channels, including retail,
online, call centers and indirect sellers; and share revenues for ad
inventory management and ad sales.
Background on U.S. video business
AT&T has seen improvement in its domestic video business in recent
quarters. It hit its peak level of subscriber losses in 2019, and
through the fourth quarter of 2020, premium video net losses had
improved sequentially for five straight quarters.2 AT&T’s video
subscriber churn has also continued to improve, and premium TV ARPU
increased 5.1% in the fourth quarter of 2020.
In 2020, AT&T’s video services advanced from #3 to #1 in J.D. Power’s
2020 Residential Television Customer Satisfaction Study. This was driven
in part by solid performance from AT&T TV — the company’s streaming
pay-TV platform which launched in early 2020. AT&T TV offers the best of
live and on-demand content and has lower subscriber acquisition costs
driven by customer self-installation.
AT&T’s U.S. video unit had approximately 17.2 million subscribers as of
the end of 2020. For full-year 2020, the unit had more than $28 billion
in revenues, operating income of $1.7 billion, operating income margins
of 6%, $4 billion in EBITDA and EBITDA margins of about 14%.3
Seamless customer transition
Once the transaction is completed, existing AT&T video subscribers will
become New DIRECTV customers and will be able to keep their video
service and any bundled wireless or broadband services, as well as HBO
Max, plus any associated discounts.
When the transaction closes, all existing content deals, including NFL
SUNDAY TICKET on DIRECTV, will be a part of New DIRECTV. Customers will
continue to have access to premium content via DIRECTV and AT&T TV and
will receive the same services, channel lineups and customer care
experience. Customer account information, online access and billing
arrangements will remain the same.
AT&T and TPG are committed to a smooth transition and seamless customer
experience and will work to further improve customer service and bring
new features to New DIRECTV’s video services.
Continued commitment to employees
Until closing, all employees will operate business-as-usual. When the
transaction closes, it’s expected that substantially all of the
employees who support AT&T’s U.S. video operations today will transition
to New DIRECTV and the remainder will remain with AT&T. New DIRECTV will
recognize its unionized labor force and will also assume and honor the
existing collective bargaining agreements covering union-represented
employees and work with the unions productively going forward. New
DIRECTV will have headquarters in El Segundo, Calif. and Denver.
“We have a talented team of employees in our video operations,” said
Bill Morrow, CEO-DIRECTV. “Their dedication and commitment to this
business will be key to New DIRECTV’s success as we work with TPG to
operate with renewed focus to deliver fantastic video services and a
superior customer experience.”
Morrow began his career with AT&T as a union-represented field
technician in California and has served as CEO of large
Under a separate transition services agreement, AT&T will for a period
provide New DIRECTV with transition support services such as IT, supply
chain, sales & service, real estate, finance and HR.
Among other items not included in New DIRECTV are AT&T’s WarnerMedia HBO
Max streaming platform, Vrio (AT&T’s Latin American video operations),
AT&T’s regional sports networks, U-verse network assets and AT&T’s Sky
AT&T financial impact
In 2021, AT&T expects to apply the cash proceeds from the transaction
toward debt reduction and does not expect a material impact to its 2021
financial guidance for:
Consolidated revenue growth in the 1% range
Adjusted EPS to be stable with 2020
Gross capital investment5 in the $21 billion range with capital
expenditures in the $18 billion range
2021 free cash flow6 in the $26
billion range, with a full-year total dividend payout ratio in the high
Going forward, the company expects that the restructuring enabled by
this transaction will support improved future EBITDA growth trajectory.
Following close of the transaction, AT&T expects to deconsolidate the
U.S. video operations from its consolidated results.
AT&T continues to maintain a solid cash position and a strong balance
sheet. The company ended 2020 with about $10 billion in cash on hand. In
addition to the $7.6 billion in cash AT&T expects to receive at the
close of this transaction, the company has secured $14.7 billion in
financing via a term loan credit agreement, the proceeds of which are
available any time before May 29, 2021, and issued $6.1 billion of
commercial paper in January 2021. The company also continues to identify
opportunities to monetize non-core assets, including its Crunchyroll
anime unit, which is pending sale for $1.175 billion.
In addition, the company has proactively managed its debt portfolio,
reducing near-term debt maturities by about $33 billion in 2020 and
lowering the overall portfolio average rate to 4.1% at the end of 2020,
down 20 basis points from first-quarter 2020 levels.
The transaction is subject to customary closing conditions and to
Goldman Sachs & Co. LLC acted as financial advisor to AT&T and Sullivan
and Cromwell LLP acted as legal advisor to AT&T. Ropes and Gray provided
legal advice to TPG and Credit Suisse acted as lead financial advisor to
TPG in connection with the transaction. BofA Securities also acted as
financial advisor to TPG.