Will AT&T’s DirecTV Spin-Off Engender Greater Focus on Mobile?

AT&T this week distanced itself from its ill-advised DirecTV acquisition in a move that will likely impact its core mobile business. The declining satellite TV business, and AT&T’s other paid TV services, are being spun off into a separate, standalone company that will be partially owned and controlled by private equity firm TPG. AT&T this week distanced itself from its ill-advised DirecTV acquisition in a move that will likely impact its core mobile business. The declining satellite TV business, and AT&T’s other paid TV services, are being spun off into a separate, standalone company that will be partially owned and controlled by private equity firm TPG. TPG is gaining a 30% interest in the new company, DirecTV, for a $1.8 billion investment and equal representation on the company’s board. AT&T will own the remaining 70% and said it expects to receive $7.8 billion from the new company following the close of the transaction, which it plans to use to pay down debt.  The spin off is not a surprise, but the outcome is remarkable considering AT&T acquired DirecTV for $67 billion (including debt) in 2015. The new standalone company, which includes AT&T TV and U-verse video services, is valued at $16.25 billion, including about $6 billion in debt, according to AT&T.  “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 and our strategy,” AT&T CEO John Stankey said on a call with analysts and investors.  The shedding of DirecTV also “sharpens our focus on the strategic businesses that are key to growing our customer relationships across 5G, wireless, fiber, and HBO Max,” he said.  The deal doesn’t dramatically change AT&T’s financial problems. It expects to receive annual distributions of roughly $1 billion from the new entity, but TPG gets preferred returns from DirecTV, which effectively means AT&T doesn’t get paid until the private equity firm takes its cut. Perhaps more importantly, the move allows AT&T to put more focus, energy, and resources on its mobile business, which generates about three-quarters of its profit, according to Roger Entner, founder and lead analyst at Recon Analytics.  “I think they’re correcting a pretty much epic mistake” and “it clears up focus” for AT&T’s better performing businesses, he said. “The bread and butter telecom needs attention, and this will provide it.” The move also represents the first real indication that AT&T intends to unravel itself from a misguided strategy to assemble a telecommunications-entertainment conglomerate. Stankey, who has been at AT&T since 1985, dismissed suggestions that AT&T plans to similarly rid itself of the assets it acquired via Time Warner for $85 billion in 2018, but he left open the possibility for all options that could aid AT&T’s ability to grow. The genesis of that vision, which was fueled by envy that erupted when multiple technology companies became incredibly valuable riding on the networks built by AT&T and others, didn’t result in smart or forward-thinking decisions, Entner explained.  The TV industry is going through dramatic upheaval, due in part to a growing clash between content owners and distributors that has bankrolled the rise of dozens of streaming services. And satellite TV providers are among the most impacted because they don’t have broadband services to reframe their businesses around, Entner said.  Time Warner, now called WarnerMedia by AT&T, is nice to have, but not essential, according to Entner. Because AT&T’s wireless business is so much larger than its entertainment business, there’s nothing those assets can do to offset challenges AT&T encounters in mobile, he said.  “People mistake the glitter of the music and the TV industry for real money. They capture an extraordinary amount of our attention for very little money” compared to the value that mobile networks generate, Entner said.