AT&T/TPG DirecTV Entity Value Roughly 1/3 of 2014 Transaction Price

The $16.25 billion in “enterprise value” of the “premium video entity” AT&T formed Thursday with TPG for the spinoff of 30% of DirecTV is roughly a third of the $48.5 billion AT&T agreed to pay nearly seven years ago to acquire the platform as a “clear and elegant path to Ultra HD” (see 1405200030). “We certainly didn’t expect this outcome when we closed the DirecTV transaction in 2015, but it’s the right decision to move the business forward, consistent with the current realities of the market,” said AT&T CEO John Stankey on a hastily arranged investor call on the transaction.

TPG will pay $1.8 billion for 30% of the entity, with AT&T owning 70%. When the deal closes in second half, the entity will give AT&T $8 billion cash to use for debt reduction. AT&T finished 2020 with a reported $153.8 billion in long-term debt.

The deal "provides us an opportunity to monetize a portion of our U.S. video assets, participate in future cash distribution from the entity and share in future value creation opportunities,” said Stankey. That prompted a Barclays analyst to ask if the TPV deal had any provision about how the ownership of the entity would be shared in any future DirecTV transaction with Dish Network. “There's a lot of different terms and conditions in it and a lot of different scenarios that might be out there, none of which I'm going to talk about or fill in the public on,” said Stankey. “If something else occurs, we get 70% of ultimately the value.”

Dish Chairman Charlie Ergen repeatedly told investors, most recently on a November earnings call, that he personally thinks a future DirecTV-Dish deal is “inevitable” (see 2011060043). “We don’t have a comment at this time,” said a Dish spokesperson Thursday.

AT&T did “a very thorough job looking at every alternative under the sun and what made sense” for the DirecTV business, said Stankey. “I'd be hard-pressed to suggest somebody can probably come up with an idea that we didn't evaluate, looked at, talked to people about, determined whether or not it made sense moving forward.”

AT&T worked on the deal for “a fairly long period of time,” Stankey said. “We've been around the block in a number of different options and thought about a lot of different alternatives for the business. The management team, the board, is convinced that this is the right step for us to take at this time.”

The transaction “is better than it seems for AT&T, but only if there is a subsequent value-enhancing transaction (like a merger with Dish),” theorized New Street Friday. “We are confident that this transaction was set up as a precursor to a second transaction, presumably a combination with Dish.”

The deal foretells “more wheeling and dealing ahead,” likely putting DirecTV’s “popular but costly” NFL Sunday Ticket service "into play," said GlobalData senior analyst Tammy Parker. “AT&T has long hinted at its desire to ditch NFL Sunday Ticket, which was used as a loss leader.” AT&T is “belatedly backing away from the linear TV business that it once hoped to dominate by creating triple-play bundles combining nationwide pay-TV with broadband and mobile services, leveraging expected economies of scale, and wielding clout with content providers,” said Parker.