AT&T is cutting the cord with a blunt pair of scissors. The U.S. telecommunications giant just unveiled plans to spin off DirecTV and other video businesses in a $16.3 billion deal, six years after buying the satellite television operator for $67 billion. A partial sale to buyout shop TPG suggests this will be a clumsy way out of a disastrous acquisition.
Terms of the transaction dictate that AT&T will keep a 70% stake in the new entity called DirecTV. TPG receives 30% of the economics, but splits control of the board and sits higher in the capital structure. It gets to appoint two directors and shares in the choice of chief executive, who will occupy the fifth seat. In exchange for injecting $1.8 billion into New DirecTV, the private equity firm co-led by Jim Coulter will receive senior preferred shares that pay a 10% cash coupon.
Under AT&T’s stewardship, DirecTV and the video assets generated roughly $4 billion of adjusted EBITDA. If that sum dips by, say, 10%, once combined with the $180 million annual payout, TPG could in theory make its money back in less than two years.
For AT&T’s part, it holds junior preferred equity in New DirecTV with a 6.5% payment-in-kind coupon. It will receive $7.6 billion in the deal, but also will be stuck with a $2.5 billion bill to pay the National Football League for rights to broadcast games this year and next. The Sunday Ticket package was supposed to be the glue that persuaded customers to stick around. And yet DirecTV keeps bleeding subscribers. Another 16% of them decamped last year, shrinking the number to 17 million.
Putting some distance between DirecTV ultimately makes sense for AT&T. It’s an asset that has caused nothing but trouble since former Chief Executive Randall Stephenson paid more than 7 times EBITDA for it in 2015 as part of a broader strategy to marry content and distribution. The separation, however, implies a valuation of about 4 times EBITDA. Rival Dish Network trades at nearly twice that multiple. It’s yet one more sign that AT&T is paying a steep price again for DirecTV.