AT&T and private equity firm TPG Capital have come together on a definitive deal that will spin off DirecTV into a separate company.

Under a proposed transaction that ended months of speculation about the fate of DirecTV, "New DirecTV" will operate as AT&T's US video unit and consist of the DirecTV satellite TV business, the U-verse IPTV business and the newer AT&T TV OTT-TV service. The transaction does not include HBO Max, WarnerMedia's new super-sized SVoD service, AT&T's regional sports networks, Vrio (AT&T's Latin American video operations), AT&T's Sky Mexico investment and AT&T's U-verse network assets.

The transaction values the new company at $16.25 billion, they said.

Per the terms, New DirecTV will be jointly governed by a board with two representatives each from 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 closing, AT&T will own 70% of the common equity and TPG will own 30%.

They expect to close the deal in the second half of 2021. AT&T is in line to receive from New DirecTV $7.8 billion (including $7.6 billion in cash) and use the proceeds to reduce its debt. TPG is contributing $1.8 billion in cash to New DirecTV in exchange for preferred units and the aforementioned 30% interest in common units of New DirecTV.

They claim the new structure will "provide greater focus, flexibility and resources" to succeed in the video business. AT&T has also been under pressure from activist shareholder Elliott Management to divest the DirecTV assets as part of a broader effort to shed unneeded businesses and cut costs further.

AT&T, which acquired DirecTV in 2015 for almost $50 billion, and Morrow, who came on board in 2019 to oversee AT&T's operational transformational efforts, might need more than focus to fix this piece of the business. AT&T shed 617,000 "premium" TV subscribers (DirecTV satellite and U-verse IPTV) and lost 27,000 OTT video subs in Q4 2020.

AT&T has already given DirecTV's satellite TV service a rural focus and halted sales of its legacy U-verse IPTV service last spring. The company has lavished more love on AT&T TV, a new OTT-TV service. AT&T TV is getting a few upgrades soon after folding in AT&T TV Now, a slimmed-down pay-TV streaming service that was once known as DirecTV Now.

AT&T and TPG said "substantially all of the employees" who support AT&T's US video operations today will transition to New DirecTV, which will be based in El Segundo, California, with the rest remaining at AT&T. Under a separate services deal, AT&T will provide New DirecTV with transition support for areas such as IT, supply chain, sales and service, real estate finance and human resources.

"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," AT&T CEO John Stankey said in a statement. "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."

Potential 'second phase options'

Update: Speaking on a call with press and analysts, Stankey said "every alternative under the sun" was reviewed during the process. When pressed by analysts about future M&A scenarios involving New DirecTV, Stankey noted that AT&T company will be diligent about considering "second phase options" that could boost the value of its stake in New DirecTV.

The underlying context is that Charlie Ergen, Dish's chairman, has continued to believe that a merger of Dish and DirecTV is a fait accompli. "Make no mistake, whether it's a year from now or ten years from now, I believe that it's inevitable that those companies go together," Ergen said last November.

Stankey declined to discuss any scenarios or conditions that could allow for such a combination, noting only that AT&T, as a 70% holder in New DirecTV, will benefit from any future value that gets created going forward.

"We feel this is the right approach moving forward," he said of the proposed transaction with TPG.

Earlier in the call, Stankey played up the drivers for the deal, noting that it will allow AT&T to reduce debt and focus on growth areas, notably those tied to "connectivity and content" with 5G, fiber and HBO Max.

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— Jeff Baumgartner, Senior Editor, Light Reading