Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Satellite television is declining fast in the US. But with its $7.6bn deal to acquire full control of DirecTV from AT&T, private equity group TPG is betting the industry can survive for long enough to fund a budget streaming option to challenge the new powerhouses of the entertainment business — Disney, Alphabet, Amazon and Apple.
Following Monday’s deal, TPG plans to merge DirecTV with Dish, the industry’s second-largest player, and fund a challenger TV option for cost-conscious Americans who want highly-tailored bundles of sports, news and scripted entertainment.
The combination of the two groups will put TPG in control of a pay-TV business with 18mn subscribers that is on track to generate more than $6bn in combined annual free cash flow this year. The buyout group believes those profits are sufficient to fund a competitive streaming TV service, said two people briefed on its thinking, and are enough for the private equity group to engineer a financial return while stewarding the decline of satellite TV.
Two decades ago, satellite TV beamed into the homes of nearly a third of paying TV users in the US before millions cut their service in recent years.
TPG’s bet comes at a time of mass change and strife within the media industry as consumers cancel cable and fibre service offerings for cheaper internet packages offered by Alphabet, Netflix and Apple, leaving many large media and telecommunications saddled with writedowns and even financial distress. The pressures have led to recent carriage disputes between media companies such as Disney and telecommunications providers including DirecTV and Charter Communications.
The cash TPG plans to pour into DirecTV and Dish underscores the pain absorbed by the industry over the past decade. In sum, it has struck deals to take control of satellite TV operations once worth about $80bn on public stock markets in 2015 for less than $4bn in its own investors’ cash, according to Financial Times’ calculations and people familiar with the matter.
TPG first invested in DirecTV in 2021 when it paid $1.6bn to buy a 30 per cent stake in the business from AT&T, which five years earlier had paid $67bn to acquire the satellite TV operator. AT&T used the buyout group’s investment to begin extricating itself from what MoffettNathanson analyst Craig Moffett called on Monday “one of the worst transactions in American history”.
As part of the deal, AT&T carved out DirecTV as a new company with a $16.3bn enterprise valuation — a quarter of what it paid.
TPG on Monday struck a deal to acquire the remaining 70 per cent of DirecTV from AT&T. The buyout group will use $2bn of equity to fund the purchase and it will pay the remainder through a mixture of new debt, dividends paid to AT&T until the deal closes — expected in late 2025 — and an earnout payment in 2029, the people said.
The Dish assets TPG is acquiring will come at an even lower cost. The buyout group will merge DirecTV with the ailing Dish Network, owned by Charlie Ergen’s EchoStar, for a nominal $1 in cash and the assumption of $11.7bn in debt that had pressured the company.
The tie-up comes with the scale TPG believes can be used to prop up both companies’ fledgling internet-first options, DirecTV Stream and Dish TV. Their so-called “skinny bundles” of targeted media offerings carry a lower cost than broader offerings such as YouTube TV, something that should give the services a “fighting chance” against tech giants including Alphabet, said one person.
But that bet is secondary to TPG’s belief that DirecTV’s existing satellite TV operations are profitable enough to generate a return, even as they bleed subscribers.
The bet will be tested by industry trends moving decidedly against DirecTV. Streaming companies Netflix and Hulu, in addition to direct offerings from media companies Disney and Paramount, have made content middlemen increasingly obsolete. These offerings have captured hundreds of millions of new customers in recent years. Amazon’s Prime Video service, for instance, has 115mn subscribers, about 11 times DirecTV’s subscriber base.
“The merger of DirecTV and Dish Network won’t change the subscriber trajectory,” Moffett, the analyst said, though it will reduce expenses.
TPG’s bet has begun to pay off. The buyout group has received dividends exceeding its initial 2021 investment, said people briefed on the matter. AT&T on Monday said it has received $19bn in distributions from the 2021 deal and DirecTV’s cash flows, in addition to the $7.6bn TPG will pay for full ownership.
AT&T did not immediately respond to a request for comment. TPG declined to comment.
Telecoms players have faced increasing financial distress as more than a trillion dollars of investments in networks, spectrum and other infrastructure have not led to substantially greater profits.
The set-up has created investment opportunities for private equity investors who cut their teeth decades ago restructuring distressed companies. TPG, founded by David Bonderman and James Coulter, made its name in capitalising on fixing broken businesses including airlines, retailers and financial institutions.
TPG will have to win support for its plan from Dish’s creditors which have been locked in a brutal fight with Ergen. The buyout group plans to cut Dish’s debt by swapping its bonds for those backed by DirecTV at about a 15 per cent discount to their par value.
EchoStar’s chief Hamid Akhavan said of the offer: “We positioned this in a way that we think is a significant win for them, and a significant win for everyone in the picture. Now, will they see it that way? Obviously, it’s up to them.”