AT&T officially affirmed last week that it will be selling a 30% stake in its DirecTV direct-to-home satellite operations to private equity investment firm TPG and will spin off the company into a new business.

AT&T will continue to hold onto the remaining controlling stake in the business after the deal closes. That’s expected to be in the second half of 2021.

Under the deal, AT&T will get $7.8 billion in cash, $1.8 billion of which will be paid directly by TPG. The $5.8 billion balance will be handled as new debt carried by the new business entity.

The new DirecTV business, which will also include AT&T’s pay-TV businesses — AT&T TV and U-verse — will also take on $200 million in debt from AT&T.

AT&T plans to use the cash received from move to reduce AT&T corporate debt.

AT&T originally acquired the DirecTV satellite operations for more than $49 billion plus debt in 2015 (for a total of $67 billion). The company continued to hemorrhage subscribers after the takeover, although the operations continue to generate some $4 billion annually in positive cash flow.

AT&T’s U.S. video unit had approximately 17.2 million subscribers at 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%, the companies reported.

The newly realigned business entity will look to reverse its continuous string of pay-TV subscriber attrition in order to turn a profit.

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“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,” stated 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.”

According to the join statement announcing the deal, TPG for the past decade “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 objectives.”

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By Greg Tarr

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