AT&T on Thursday sold a minority stake in its video business to private equity firm TPG. The deal values DirecTV, AT&T TV and U-Verse at roughly $16 billion combined — less than a third of the $49 billion AT&T spent to buy DirecTV in 2015.
The ill-timed deal was doomed from the start. AT&T bought DirecTV just as cord-cutting became the norm.
Although the marriage is less than six years old, AT&T (CNN’s parent company) has been trying to unload DirecTV, or at least a portion of it, for quite some time.
The “nonsensical” merger will go down in history “as one of the worst deals ever made,” according to Craig Moffett, a telecom analyst at MoffettNathanson.
“And the crazy thing about it is that people knew it was a bad deal when it was happening,” Moffett told CNN Business. “It’s not like people at the time didn’t see cord-cutting coming.”
AT&T and TPG will create a new company called “New DirecTV.” Following the close of the transaction, AT&T will own 70% of the new venture, which the company believes can create “future value creation opportunities.”
“With our acquisition of DirecTV, we invested approximately $60 billion in the US video business,” an AT&T spokesperson told CNN Business. “It’s fair to say that some aspects of the transaction have not played out as we had planned, such as pay TV households in the US declining at a faster pace across the industry than anticipated. However, since AT&T closed the DirecTV acquisition in 2015, the business has generated cash flows of more than $4 billion per year, and we expect this to continue in 2021.”
The AT&T spokesperson added that the company invested that cash into its fiber broadband and expansion of its 5G network.
The original deal, which cost AT&T $67 billion with debt, happened as the pay-TV landscape completely — and drastically — shifted. Streaming businesses like Netflix began to gain popularity, leading to an acceleration of cord-cutting that made DirecTV less dominant in the marketplace.
This shift has only accelerated. For example, AT&T reported that it lost about 3 million video customers in 2020, more than 600,000 of them in the fourth quarter alone.
Moffett explained that AT&T’s strategy at the time was to buy a TV distributor to diversify its business in hopes of supporting a “very large, costly dividend.”
“In retrospect, the wireless business has turned out to be the best business that AT&T has,” Moffett said. “And it’s the diversification strategy that is now dragging the company down.”
The DirecTV purchase is all the more glaring since, unlike Comcast or Charter, DirecTV prior to the AT&T deal didn’t offer broadband to its customers. Satellite companies have been hit much harder than cable businesses in recent years.
“Virtually since the transaction closed, cord-cutting picked up… AT&T was not able to deliver on its original rationale for the DirecTV deal,” said Bernie McTernan, a senior analyst at Rosenblatt Securities.
Offloading DirecTV now, even at a firesale price, takes a strain off AT&T’s income statement and helps pay down AT&T’s massive debt from its 2018 purchase of Time Warner. That $85 billion acquisition — which put Warner Bros., HBO, CNN, TBS, and TNT, among others, under AT&T’s banner — made AT&T the most highly leveraged company in the world.
In an ironic twist, the move to buy Time Warner was brought about at least in part by the same rapidly changing media landscape that ultimately crippled DirecTV. Now, AT&T’s priority is embracing the change that disrupted its business by focusing on growing its nascent streaming service, HBO Max.
HBO Max has had a solid start bringing in more than 17 million activations since launching in May. HBO Max and HBO subscribers combined topped 41 million domestically and nearly 61 million worldwide. But that’s still far from its biggest rivals, Netflix and Disney+, which have 203 million subscribers and 95 million subscribers, respectively.
“AT&T’s new strategy appears to be embracing growth within the media ecosystem, which means content with HBOMax and investing in fiber broadband,” McTernan said. “I think these are the right areas to be investing in, but they are expensive and face high levels of competition, so success is not guaranteed.”
So, now with a sizable portion of DirecTV off its books, what can AT&T learn from its bungled deal?
“I think that they’re trying now to dramatically retrench and focus around their wireless business, HBO Max, and their wired broadband business,” Moffett noted. “Unfortunately, you can’t pretend that you didn’t buy those assets because the debt that you took on to buy them is still on the balance sheet… They bought a house they couldn’t afford, and it turned out to be not a very nice house.”