Since AT&T announced on February 25 that it was selling a 30 percent stake in DIRECTV, many industry analysts, journalists, and subscribers have wondered why. The satellite TV service has lost more than six million customers since AT&T purchased it in 2015, but what is the benefit now of selling a minority share to a private equity firm, TPG. Was the sale a desperate move to eliminate some corporate debt, or does AT&T believe that it can somehow transform the satcaster’s business?
John Stephens, AT&T’s chief financial officer, addressed that question yesterday in a presentation to a Deutsche Bank media conference and here are the highlights of his remarks:
Stephens said the deal, which calls for DIRECTV to be a separate company after its close, means more resources and focus for the satcaster.
Many have noted that AT&T has often seemed to neglect DIRECTV during its nearly six-year ownership. The telco has launched two different live streaming services (AT&T TV, AT&T TV Now, formerly known as DIRECTV Now) since the purchase as well as HBO Max, a new competitor in the Video on Demand streaming category. This has distracted AT&T’s executives from focusing on DIRECTV during a time when they desperately needed to do so. With cord-cutting escalating, DIRECTV needs a new strategy and tools to attract new customers and keep old ones.
The new DIRECTV will have a new CEO, current AT&T executive Bill Morrow, as well as a new five-member board that will include two TPG appointees. TPS is expected to be heavily involved in reshaping the satellite TV service.
“(The sale) gets focus, focus for the DIRECTV business outside the big machine that is AT&T,” Stephens said.
The financial officer added that the added attention could benefit AT&T TV and DIRECTV. (The new DIRECTV will also include AT&T TV and U-verse; there was no mention of U-verse in yesterday’s discussion.)
“Additionally, it gives us optionality. If there is an opportunity to improve the operations business, if there is an opportunity to take AT&T TV to a further level, if there is opportunities to further manage costs, we’ll benefit from that and we’ll benefit because we still have 70% ownership. So from that perspective, it made sense and it was the right thing to do and TPG is the right partner,” Stephens said.
Stephens said the sale will continue to allow AT&T to bundle DIRECTV with company products such as phone and Broadband, and HBO Max.
“I will point out, not only do we have a 70 percent economic interest going forward but we’re going to provide a transition services arrangement,” Stephens said. “We’re going to be able to continue to bundle video products with our broadband, with our wireless. We’re going to have — there’s going to be that encouragement going both ways. And quite frankly, they’re going to be a big business partner in the sense of they’re still one of our largest content buyers for TNT and TBS and CNN. So this is a partnership that we look to work with them closely, but we appreciate the skills and focus that they’re going to bring to that business for improvement.”
But despite the potential operational benefits, Stephens acknowledged that there was also an important financial reason for the deal. TPG is giving $7.8 billion to AT&T for its stake, which will help the latter reduce corporate debt.
“We get that, I say about $8 billion, $7.8 billion upfront,” Stephens said. “The next $1.8 billion, if you will, is — goes to TPG to turn their preferreds and then we get our remaining $8 billion, $8.5 billion investment out as an recovery. And then we start sharing in the remainder, 70-30. So we feel in a very good position to recover all of our funds and the opportunity to have a positive opportunity going forward from the partnership.”
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— Phillip Swann