DTH
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Carving out DTH biz DirecTV, the AT&T-TPG way

AT&T’s video business unit is being spun off into New DirecTV.

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MUMBAI: Here’s another look at how things are playing out in the DTH space in the US.

AT&T, which acquired leading DTH firm DirecTV in 2014 in a much celebrated $48.5 billion deal, has announced it had reached an agreement with TPG Capital, the private equity platform of global alternative asset firm TPG, to spin that asset off into an entity called New DirecTV. The latter will house AT&T’s US video business unit (consisting of the DirecTV, AT&T TV and U-verse video services) which has been valued at $16.25 billion, almost one third of what AT&T paid for it.

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 US video unit. Following the close of the transaction, AT&T will own 70 per cent of the common equity and TPG will own 30 per cent.

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, they say, 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 US 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 TPG partner David Trujillo. “TPG looks forward to partnering with AT&T and new DirecTV leadership to bring the right focus, attention and execution in support of it new 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 its debt. TPG will contribute $1.8 billion in cash to the new company  in exchange for preferred units and a 30 per cent  interest in its common units.

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.

“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,” said TPG principal John Flynn. “We are particularly excited by the opportunity to grow new DirecTV’s streaming video service, leveraging the company’s leading pay-TV platform, talented labour force and large subscriber base to transition it into a leading next-generation video provider with best-in-class content and customer experience.”

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 the latter’s  video subscribers continued access to HBO Max; allow both companies to serve customers through multiple distribution channels, including retail, online, call centers etc.

AT&T’s US 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 per cent, $4 billion in EBITDA and EBITDA margins of about 14 per cent.

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 Mexico investment. The company also continues to identify opportunities to monetise non-core assets, including its Crunchyroll anime unit, which is pending sale for $1.175 billion.

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