Dish Network chairman Charlie Ergen said Thursday that the satellite TV business would “melt away” without a merger between his company and DirecTV, but in addition to boosting that dying industry for a few more years, a merger could possibly serve another purpose -- funding Dish’s $10 billion wireless buildout. 

Ergen’s prediction that a DirecTV deal is inevitable has almost become a quarterly tradition. But continued speculation that a deal was more likely to happen now than ever -- fueled by dramatic subscriber declines at both companies -- helped drive Dish stock up by more than 11% Friday and 16% in the past two days. That helped erase the stock’s 2022 decline -- it was down 15% since December 31. But it’s still a long way from the $45 per share range the stock was trading at just five months ago.   

It’s been clear for years that Dish and DirecTV are basically shells of their former selves, and Dish shedding 273,000 video customers in Q4 -- well ahead of analysts’ consensus estimates -- is more proof that the satellite business needs help. Even Ergen seems to believe that time is quickly running out for the business.   

“I think it's inevitable that Dish and DirecTV go together,” Ergen said Thursday during Dish’s Q4 earnings conference call with analysts. “Otherwise, both companies will just melt away, and there'll be no service for customers. The regulatory reasons to not allow it, don't exist anymore.” 

Also: Satellite TV: Five Years, that’s All You’ve Got 

While there has been a lot written about the possible synergies associated with a DirecTV merger, Barclays Group media analyst Kannan Venkateshwar took a look at whether a deal could help Dish fund its $10 billion wireless network buildout. His conclusion: while regulatory hurdles are fewer, it will all come down to valuation.  

Dish has repeatedly said it will cost about $10 billion to build its 5G wireless network, and said Thursday that it expects capex to more than double this year to $2.5 billion from $1 billion in 2021 to pay for the network. Dish is expected to launch its first wireless market -- Las Vegas -- soon and revealed another 25 cities, including Dallas, Nashville, St. Louis and Oklahoma City, that will receive service in the coming months. Still, delays associated with difficulties surrounding integrating equipment and software from different vendors, and a snag regarding 911 emergency service have pushed back the buildout schedule. 

“We’re six months behind where we thought we’d be, and it’s my fault,” Ergen said on the conference call. “We just didn’t anticipate that we would have to do as much on the technical side.”

And though analysts have said in the past they believe the $10 billion buildout figure is surprisingly low, Ergen stressed that because its network configuration is different than any other provider -- he said it was more of an IT network than a wireless network -- the number is valid. 

“Because we're in the cloud, we can automate and do things and provision and other things that people can't do,” Ergen said on the call, adding that its labor costs are lower, too.

But it still is going to cost a lot. Analysts have noted that the $10 billion figure does not include tower leases for the service. In a research report, MoffettNathanson senior analyst Craig Moffett wrote that Dish has commitments for about $12.7 billion in tower leases, which is in addition to the $10 billion construction budget.

So where is Dish going to get the money for that? Ergen has said that funding is readily available, but some have wondered whether the source could be a merger with DirecTV.

Also: Does a Dish DirecTV Merger Make Sense? 

In January, the New York Post reported that Dish and TPG were in talks concerning a DirecTV merger deal, but so far neither side has confirmed that and there are no signs that a deal is close. 

Dish and DirecTV tried a merger before -- in 2001 -- but were blocked by government regulators who said a deal was anticompetitive. But the landscape has changed dramatically since then -- DirecTV and Dish combined have about the same number of TV customers that DirecTV alone had five years ago. But are still roadblocks to a combination. 

Venkateshwar also believed that regulatory challenges are fewer -- and could be even less if the government decided to impose broadband deployment conditions to a deal for both parties. AT&T already is committed to building out fiber broadband to rural markets. And Dish’s wireless offering is mainly targeted at smaller cities. Requiring the two expand their rural broadband footprint as a condition of a deal seems like a no-brainer.    

But what could derail a satellite TV deal, according to Venkateshwar, is valuation. 

The analyst pointed to AT&T’s sale of a 30% stake in DirecTV to private equity group TPG Capital, a deal that valued the satellite giant at $16.25 billion, about one-quarter the $65 billion AT&T paid for the asset back in 2015. And though he wrote that synergies in a deal could be significant -- between $1.5 billion and $2 billion -- valuation is where a transaction could hit a snag.

Venkateshwar estimated that the TPG deal valued DirecTV at about 3 times forward looking cash flow, but said the actual valuation could be lower considering non-cash fulfillment costs. 

“At these valuations, the deal will not make sense for Dish given the debt attached to its own DBS assets, as there may not be any equity value left at 3x EBITDA even including synergies,” Venkateshwar wrote. “A big difference in valuation between DTV and Dish would risk Dish implicitly walking away with a large part of the deal synergies and potentially future cash flow (if Dish continues to be an investor) in the combined company.”

That could be a problem for AT&T because its free cash flow guidance of about $20 billion pro forma for its WarnerMedia merger with Discovery relies on $1 billion in free cash flow from DirecTV. 

“This is why the transaction parameters may be difficult to narrow down, especially given Dish Chairman Charlie Ergen’s proclivity for an all or nothing approach to deal making and Dish’s own need for capital,” Venkateshwar wrote. 

There could be other deal structures, including having TPG invest in Dish prior to the assets being combined, or, like the WarnerMedia/Discovery transaction, Dish could split off the satellite TV assets before combining them and spinning it off to shareholders. 

“However, all these deals will require some flexibility from Dish to meet mid way to satisfy AT&T’s strategic needs, something that is not a given,” Venkateshwar wrote.

Dish could just sell the satellite TV asset outright and pocket the cash, but Venkateshwar added that, too, isn’t as easy as it sounds.

For starters, selling off the satellite TV business would remove a big cash generator for Dish, leaving it with a wireless business that isn’t generating as much revenue as its current free cash flow take. enough revenue  

“While the balance sheet would be much lighter in theory, raising further capital to fund its wireless business without any cash generating asset could become expensive,” Venkateshwar wrote. “This is why Dish will likely want a much higher valuation if it has to sell out of the asset, which is likely to make the deal less attractive for AT&T. This framework in essence highlights the challenges in negotiating the deal even absent regulatory issues.”

MoffettNathanson senior analyst Craig Moffett has said that a DirecTV merger would be good for both companies in the past, but he isn’t convinced it’s possible. Moffett wrote in a Thursday research note that a merger really depends on synergies, and given Dish’s gross subscriber additions, there aren’t many to be found in a combination of the two.

“A merger wouldn’t allow for consolidation of satellite fleets, nor would it change industry growth rates, but it would reduce the activity levels required to achieve those growth rates by cutting churn, and gross additions, roughly in half,” Moffett wrote. “But with gross additions this low, there isn’t much synergy opportunity left here.”

Nevertheless, Dish stock was up 11% Friday, in part because of merger speculation but also because Ergen offered more details on the wireless rollout and the apparent resolution to another dilemma -- T-Mobile’s decision to shutter its 3G CDMA network, the very platform over which most of Dish’s Boost Mobile customers receive service. Ergen said that T-Mobile will shut off the CDMA service on March 31, and that the two are working together regarding communications, handset supplies and incentives. That should make some investors happy.   

For the rest, Dish plans to hold an Analyst Day on May 10 -- its first in about 15 years -- where it hopefully will address any remaining doubts and questions. In the meantime, the stock continues to be fueled by what Dish might do, not necessarily what it is doing. ■

About seven years after embarking on a bold new strategy to transform itself into a media company, AT&T is months away from becoming a phone company again. But merely selling off its media assets -- and getting very little in return -- won’t solve all of the telco’s problems, says MoffettNathanson senior analyst Craig Moffett.

AT&T spun off DirecTV to TPG last year, in a deal that valued the satellite TV giant it bought for $65 billion in 2015 at about $16.5 billion, and is nearing the finish line in its spin off of WarnerMedia to Discovery Inc., a deal that will net AT&T $48 billion in cash and give its shareholders a 71% stake in the new entity. In a research report Thursday, Moffett wrote that although it's about time AT&T acknowledged its media experiment was a horrible mistake, merely selling off those assets won’t get it out of the hole the company has dug for itself. 

Taking a look at AT&T’s share performance over the past five years is a big indication of how dalliances with media have mostly had one effect -- seriously eroding value. 

Investors weren’t really pleased when AT&T said it would buy DirecTV back in 2015, driving the stock down about 6% from $36.38 per share when the deal was announced on May 18, 2014 to $34.29 each when it closed on July 24, 2015. But despite paying a hefty price for DirecTV just as the satellite TV provider was beginning its downward spiral (it would lose about 7 million subscribers over the next seven years). AT&T managed only to slightly underperform the S&P 500, lagging that index by about 3.6%, according to Moffett. But when AT&T doubled down on media and announced a $100 billion deal to buy Time Warner on October 22, 2016, the real slide began. For the next four and a half years, according to Moffett, AT&T stock trailed the S&P 500 by more than 100 percentage points.

So, it would seem logical that if investors hated AT&T as a media company, they’d love it when it finally unwound that whole mess, right? Not a chance. Since announcing the TPG deal in February 2021 and the WarnerMedia Discovery deal in May 2021, AT&T stock has underperformed the rest of the market by 29%, per Moffett. Over the full seven-year period, AT&T lagged the S&P 500 by 176 percentage points, making it one of the  worst performing stocks in the index over that time frame.    

Also: AT&T Investors Bail as Discovery Close Nears 

In his report, Moffett said there are two conclusions to take from that “soul-crushing trip down memory lane:” One, that the underlying telecom business was shaky to begin with; and two, that “the damage from the two acquisitions can’t be undone simply by selling them off.”

At the heart of AT&T’s problems are its debt, currently at about $153 billion as of December 31. According to Moffett, the DirecTV deal was less a sale than a leveraged recapitalization, so it won’t have much effect on its debt load. The WarnerMedia merger, expected to close in the second quarter, will pump about $48 billion in cash into AT&T’s coffers at least partly to pay down debt. But even after that cash infusion, AT&T will have obligations of well over $100 billion.

Also: Eureka, AT&T is a Phone Company Again 

While other companies have carried huge debt loads while managing growth businesses -- the cable industry for one -- Moffett’s biggest fear is that the wireless business, which will account for the majority of AT&T’s total business, isn’t growing as much as it used to.

AT&T added about 884,000 postpaid wireless customers in Q4, but the majority of those gains have been won through deep, deep discounting. And customers that sign on for a free handset or free months of service tend to go away when they see another promotion elsewhere.  

Also: AT&T and TPG: There is No Why 

According to Moffett, AT&T service revenue was up about 3.2% in Q4 while operating revenue rose about 4.2%. Back out WarnerMedia, video and Vrio (its Latin American operation sold to Groupo Werthein in November) and operating revenue grew 1% and service revenue was down 0.3% in the quarter.

Cash flow in the new core businesses also will be hit hard by the DirecTV and WarnerMedia sales. Moffett wrote that AT&T’s pro forma organic EBITDA growth in Q4 was 0.0%.

“Investors might be forgiven for their lack of celebration about stripping to this particular core of assets,” Moffett wrote. ■

About a year after it purchased a 30% interest in DirecTV for a bargain price, private equity firm TPG Capital is reportedly in talks with Dish Network about a possible merger of the satellite giants, a move that while familiar, nevertheless managed to boost Dish stock about 10% in the past two days.

Dish shares were up about 4% ($1.43 per share) to $35.38 on January 11 and rose another 4% to $36.83 at 11:03 a.m. on January 12. 

The New York Post reported January 11 that TPG and Dish were in advanced talks concerning DirecTV, but that the deal has hit a potential snag amid Dish founder and chairman Charlie Ergen’s supposed demands for a big chunk of voting shares and a greater say in decision making for the combined company. Together, Dish and DirecTV would become the largest pay TV distributor in the country with about 23 million subscribers, edging out Comcast by a few million customers, but coming during a time when consumers have been canceling their pricey video subscriptions for streaming services.    

Talks of a Dish-DirecTV merger have been around for decades. The two first stepped to the merger podium in 2001, only to be shot down by federal regulators. With the satellite business in steep decline — Dish has lost 5 million TV customers and DirecTV has shed 10 million since 2017 — some have speculated that the government may be more open to a merger this time around.

Whether federal regulators would approve a deal this time isn't a given. Just two years ago, the U.S. Justice Department let Dish know that it would not sign off on a merger. Maybe that stance has softened, maybe not.

Ergen has said for years that he believed a merger with DirecTV was “inevitable,” and some have claimed a combined Dish-DirecTV would have about $1 billion in cost synergies. 

Every single business in the pay TV space — distributor, content provider, streamer — wants additional scale, and having 23 million TV subscribers (15 million from DirecTV, 8 million from Dish) would deliver that, at least for the short term. Federal plans to pump about $65 billion to help extend broadband into more rural markets could also bode well for a merger. 

From a financial standpoint, the idea that a deal could be done cheaply for the parties involved also makes it more palatable. TPG bought its 30% interest in DirecTV last year for a price that valued the entire company at about $16.5 billion. AT&T paid about $66 billion for DirecTV in 2017. 

Also: AT&T and TPG: There is No Why 

Still, on the surface, putting together two companies in steep decline only seems to prolong the inevitable race to zero customers. But others say that any delay to that apocalyptic conclusion could have some real economic value and short-term benefit for consumers. 

Also: Satellite TV: Five Years, that’s All You’ve Got 

In an email message, MoffettNathanson senior analyst Craig Moffett said that while he has no idea whether talks between the two companies are actually going on, a merger deal has made sense for a long time. 

“Satellite TV will remain the only available option for rural Americans for some time — rural broadband buildouts take time — and ultimately regulators will have to take that into consideration,” Moffett said in the email. “Is one stronger satellite operator better for rural Americans than two weaker ones?”

Sanford Bernstein media analyst Peter Supino said in an email that a merger seemed plausible because “the point is to capture the efficiencies of putting the two companies together.”

Also: Getting Rid of DirecTV Won’t Be So Easy 

He added that combined EBITDA would be billions of dollars more than what the two generate today, and there are opportunities to reduce programming, network, subscriber acquisition and retention costs, as well as general and administrative expenses (G&A).

And even though Dish has shifted its focus to wireless — it is currently in the throes of building out its network — a DirecTV combination could provide a valuable cache of future mobile customers. 

More Mobile Opportunity

“The satellite TV business’s value to Dish is primarily financial, but to the extent Dish becomes more active in the future in the mobile services business, those TV subs represent potential customers to which Dish could market efficiently,” Supino said.

He added that Dish’s pitch to the Federal Communications Commission for the deal could be that the merger could curb future programming cost inflation by giving the combined company more bargaining power, and a merger would allow satellite TV to survive for a longer period. 

LightShed TMT Partners partner and media and technology analyst Rich Greenfield predicted that Dish and DirecTV would get together this year, part of his January Top 22 TMT Predictions for 2022. While talk of a combination has gone on for years, only to be quashed by regulators, he said believes this is the year for a combination to take place. 

“No, really,” Greenfield wrote. “We believe the regulatory risks today are not high given the state of the Pay TV market. Frankly, if Ergen can’t get it announced this year, it might never happen.” ■

Cable operators RCN, Grande Communications, Wave Broadband, enTouch and commercial fiber-services provider Digital West said they will officially consolidate their brands under the Astound Broadband name effective today (January 12).

“This is an exciting time for our company with our new name solidifying our commitment to ‘astound’ our customers each and every day through our national fiber-rich network, fast reliable service, mission-critical connectivity, and award -winning customer service,” Astound Broadband CEO Jim Holanda said in a statement. “Keeping ourselves grounded in our deep-rooted focus on customer service is at the core of what we do. We’ve been part of our local communities for years. Our dedicated teams will continue to serve the areas where they live and work.”

Astound Broadband has more than 1 million customers, which is enough to rate as the sixth largest cable operator in the U.S. 

To ease the transition, each region will retain sub-brands under the Astound umbrella — Astound Broadband powered by RCN, in the Northeast; Astound Broadband powered by Grande in Texas and Astound Broadband powered by Wave on the West Coast. The former Harris Broadband systems in Central Texas and WOW properties in Illinois, Indiana and Maryland will follow by mid-year. For business services, the combined companies will be unified as Astound Business Solutions. 

In an interview, Holanda said the sub-brands will probably last between 12 and 24 months, and then all of the systems will be branded under the Astound umbrella, “to ease customers and communities into it, to understand that they’re still dealing with the same local management, the same local employees and the same great service and company that they’re accustomed to.” 

Repainting trucks and issuing new uniforms to employees has already begun. 

In an interview, Holanda said the work to unite the companies under one name probably started about 2½ years ago.

“We knew after we bought Wave that at some point if we kept buying cable companies that we were going to have to unite the brand under a single name,” Holanda said, adding that while several names were considered, “We kept coming back to Astound.” 

The rebranding process was further delayed by the pandemic and later by former parent TPG’s decision to sell the company to Stonepeak Infrastructure Partners. The Stonepeak deal closed in August, near the end of the quarter, which made a rebranding unfeasible, and then 2021, a series of purchases helped push back the date even further. Astound closed its purchase systems in Anne Arundel, Maryland; Chicago and Evansville, Indiana in from Wide Open West for $661 million in November. Later, Grande Communications purchased Harris Broadband. 

Cable watchers should be familiar with the Astound Broadband name — it has been used as the moniker for the parent of the five smaller operators for years and dates back to former parent TPG’s 2017 purchase of Wave Broadband. Holanda said Wave purchased a Northern California provider named Astound Broadband about five years ago, which made selecting the name even easier. 

“We owned the domain names, we already had that in place, so when we started really digging into the research, not only did we love the [Astound] name and the aspirations of it, the fact we owned it made it almost a no-brainer at that point,” Holanda said. ■

AT&T is expected to close the spinoff of pay TV services including DirecTV "in the next few weeks," company CFO Pascal Desroches told equity analysts during the wireless company's second quarter earnings call Thursday. 

AT&T struck a deal with private equity firm TPG back in February to spin off DirecTV, U-verse TV and AT&T TV, keeping a 70% equity stake. 

"I think we moved through the DirecTV process a little bit faster than what we had expected. It's not a complicated transaction," Desroches said. 

According to Desroches, the deal will mean that AT&T will close its fiscal 2021 calendar sans about five months of DirecTV revenue, a hit estimated to be around $9 billion. About $1 billion of EBITDA will come off the bottom line, as will about $1 billion in free cash flow.

AT&T will receive between $1.75 billion - $2 billion in cash from TPG, and much more cash in its subsequent spinoff of WarnerMedia with Discovery Inc., all of which will be used to pay down debt and relieve interest payments. 

"Once the WarnerMedia transaction closes, our net debt will go down significantly, and the interest savings for that are fairly meaningful. You can do the math," Desroches said. 

"Just think roughly $45 billion of cash coming in, and that's after our DirecTV cash that we expect to come in beginning of August. So overall, we expect a meaningful savings in interest," Desroches added. 

The FCC announced last week that it has signed off on the DirecTV spinoff. 

AT&T subsequently announced that it would sell around $6.2 billion in DirecTV debt to help finance the transaction. AT&T also announced the sale of its DirecTV Latin American operation.

AT&T is selling $6.2 billion worth of DirecTV Holdings debt in order to finance the spinoff of its linear pay TV assets. 

The telecom is selling $3.1 billion of six-year secured bonds (aka junk bonds) that are set to price Thursday and may yield around 6% to 6.5%, sources close to the company told Bloomberg. 

AT&T is also looking to sell a $3.1 billion six-year leveraged loan that pays about 5.25 percentage points more than the London interbank offered rate, the news service also reports.

The FCC already signed off on the deal, which will see DirecTV, AT&T U-verse TV and AT&T TV spun off into a new entity, with private equity company TPG owning 30%.

AT&T will likely have more updates on the spinoff Thursday when it reports second-quarter earnings. 

The Federal Communications Commission has approved AT&T's spinoff of its traditional video distribution business as it moves toward streaming (HBO Max) as its video play of choice, citing the parties‘ undisputed claim that the New DirecTV company that will result would be stronger because it could focus on traditional video.

The FCC will not require the New DirecTV to deliver local TV station signals to the 12 smallest markets, as the broadcast affiliate associations had asked. It also declined to apply any program carriage conditions on the deal.

Also Read: AT&T to Sell $6.2 Billion of Debt to Finance DirecTV Spinoff

Also on Friday, AT&T revealed to the SEC that its soon-to-be-spun-off linear pay TV assets collectively lost 473,000 customers in the second quarter, which actually constituted a reduction in churn for the group of services led by DirecTV. 

AT&T reports its second-quarter earnings on Thursday.

Back in February, AT&T struck a deal with investment management firm TPG to spin off its pay TV business into a new company, with AT&T retaining 70% of the New DirecTV. But to do so the FCC had to approve the transfer of the DirecTV satellite licenses.

TPG had owned Astound Broadband, but sold it last month. It will have a 30% interest in New DirecTV, with AT&T and TPG each getting a board seat, with two independent non-voting members named by each and a ninth seat to be filled by the CEO.

Also Read: Satellite TV: Five Years, That’s All You’ve Got

Citing the sale of Astound, the FCC said: “TPG no longer owns any significant interests in video programming or distribution assets and so the proposed transaction does not increase concentration or reduce competition in any market nor raise vertical concerns.”

As to denying to make local-into-local service as a condition of the license transfer, the FCC said that the affiliates “have not offered evidence or established a credible theory by which the competitive pressures DirecTV faces to imitate or differentiate itself from other MVPDs in those markets would change as a result of this transaction.”

DirecTV is under no obligation to deliver local TV station signals in any market, but if it chooses to deliver any such signal in a market it must carry all the TV station signals in that market. DirecTV does not choose to deliver the signals in those smallest markets.

Dish Network stock fell more than 5% Wednesday after JP Morgan media analyst Phil Cusick downgraded the stock, casting doubt on the satellite TV giant’s wireless plans and adding that the one potential bright spot in the strategy is at least two-to-three years off.

Cusick downgraded Dish shares to “underweight” from “neutral,” but raised his 12-month target on the shares from $38 to $45 each, saying that its plans to build a wireless network in the next several years could be extremely costly and that the No. 2 satellite TV service provider enters the market at a time when barriers are high and competition is fierce. 

Dish shares fell as much as 7.3% ($3.16 each) to $40.42 per share on June 9, closing at $40.44 each, down 7.2%. 

“We can’t find a way but to be skeptical on the Dish story,” Cusick wrote. “[W]e have nothing but respect for Dish chairman Charlie Ergen and his team, but can’t get over our skepticism on three major issues.”

Those issues, according to Cusick are the difficulty in building a wireless network, Dish is expected to struggle to compete against wireless carriers with double and triple its spectrum holdings, and fears that Dish may be too late to the 5G game as other carriers have accelerated deployment and eliminated any advantage Dish would have had if it had been first. 

Dish has said it would spend about $10 billion to build a nationwide 5G wireless network based on ORAN technology, a figure that many analysts said is shockingly low. Dish has about one year to make the network available to 20% of the country as part of the federal requirements for its wireless spectrum licenses, and to 70% of the country by June 2023, deadlines the company says will be reached easily but that other analysts are skeptical can be achieved without a partner. Dish has said it will launch service first in Las Vegas in the third quarter. 

Also Read: Dish: No Partner Needed for Wireless Dance 

Some had hoped that partner would be Amazon, and Dish said in April that it picked the e-retailing giant to provide cloud services for its wireless offering. But so far, Dish is expected to build the network on its own. 

In his report, Cusick wrote that the only bright spot for Dish’s wireless endeavors -- a possible partnership with Amazon in some sort of “Prime Wireless” offering -- if it were to occur, is at least two to three years off in the future. 

“What could a ‘Prime Wireless’ offer look like? What would it bring? We think a lot about where we could be wrong, and how Dish could really disrupt the wireless industry,” Cusick wrote, adding that it’s difficult to see how the satellite company could offer disruptive pricing on its own. 

While Cusick says it is possible that Dish and Amazon could mirror what e-retailers Rakuten and Jio have done with wireless -- offering months or years of free wireless service to drive Prime subscriptions -- he still has doubts.

Also Read: Satellite TV: Five Years, That’s All You’ve Got 

Cusick estimated that it could cost Amazon as little as $11 per subscriber per month to offer a Dish wireless service with Amazon Prime, but he wondered “why Amazon would do this until Dish’s network is proven and of sufficient quality. It makes a lot more sense to us, if it happens, 2-3 years from now at earliest.”

Cusick also speculated on a possible merger of satellite TV assets with rival DirecTV, which in February said it would spin off its TV business with private equity firm TPG. He added a deal is more likely to happen now, especially as content providers continue to unleash direct-to-consumer products, but would likely take at least a year to complete.  

Also Read: Dish Gets Back to its Rural Roots

“We believe that a combination of Dish and DirecTV is likely to face substantial regulatory scrutiny should the parties come to an agreement given the rural concentration of the sub base, but we believe that a deal can eventually be approved,” Cusick wrote. “A deal could be announced by 2022, after AT&T's sale of DirecTV to TPG closes, but getting Ergen and AT&T executives to agree on a price is likely to face hurdles.”

Cusick noted that while the 2007 merger of Sirius Satellite Radio and XM Satellite Radio Holdings is often cited when predicting federal approval of a Dish-DirecTV union, it took 17 months for that earlier deal to get the regulatory nod, “despite the stress that the businesses were under.”

AT&T said it reach an agreement with investment company TPG to spin off its pay-TV assets -- DirecTV, AT&T TV and Uverse -- into a new company.

AT&T bought DirecTV in 2015 for $49 billion. The new deal reportedly values the pay-TV assets at $15 billion. AT&T also bought WarnerMedia, but has been trying to pivot its entertainment business from pay-TV to streaming with HBO Max.

AT&T will own 70% of the new company and TPG will own 30%. As part of the transaction it will receive $7.8 billion in cash and the assumption of debt from the new company. TPG will contribute $1.8 billion in cash to the new company.

Also Read: Cord Cutting Still Nearly Double For the Big Four U.S. Pay TV Providers Over 2018

The CEO of the new company will be Bill Morrow, who is now CEO of AT&T’s U.S. video unit.

DirecTV’s agreement for NFL Sunday Ticket will be moving to the new company.

“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. 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,” said AT&T CEO John Stankey.

Also Read: AT&T and DirecTV: Divorce Won’t Be Easy

“As the pay-TV industry continues to evolve, forming a new entity with TPG to operate the U.S. video business separately provides the flexibility and dedicated management focus needed to continue meeting the needs of a high-quality customer base and managing the business for profitability. TPG is the right partner for this transaction and creating a new entity is the right way to structure and manage the video business for optimum value creation,” Stankey said.

“Video remains a core service for tens of millions of households. Since its launch in 1994, DireTV has continually evolved its product, content and service to provide customers an industry-leading video offering. As video consumption habits evolve, the new DirecTV will continue investing in its offering to provide value to its customers, including through next-generation streaming pay-TV services,” said David Trujillo, partner at TPG. “TPG looks forward to partnering with AT&T and new DirecTV leadership to bring the right focus, attention and execution in support of new DirecTV position as a competitive video provider for the benefit of its customers and employees.”

Also Read: Fixed and Dilated

AT&T is “nearing” a deal to sell a “substantial” minority stake in its DirecTV satellite TV service, as well as its U-verse and AT&T TV Now platforms, to private equity firm TPG, CNBC reports. 

It was reported last month that AT&T was in serious talks with TPG, but the inclusion of the legacy U-verse platform, as well as the virtual MPVD AT&T TV Now, is somewhat of a new twist, although it had been previously bantered about in speculation.

The new report, based on the usual unnamed sources close to the negotiations, said the deal would value the assets at around $15 billion—also in line with previous leaks. 

AT&T didn't immediately respond to Next TV's inquiry for comment and confirmation.

AT&T would use the proceeds to pay down $150 billion in debt, partly accrued with the $49 billion purchase of DirecTV back in 2015.

In 2020, AT&T lost 3.261 million paid users across DirecTV, U-verse and AT&T TV Now, as well as its recently launched, IP-delivered AT&T TV platform. This came after the telecom shed nearly 4.1 million subscribers across its pay TV platforms in 2019.

AT&T finished 2020 with just 17.2 million pay TV subscribers across its platforms—a total that had surpassed 24 million as recently as 2018.

AT&T stopped selling new U-verse subscriptions over a year ago. And it ceased selling new AT&T TV Now vMPVD bundles last month. The telecom's video strategy is now centered around WarnerMedia and its HBO Max subscription steaming service, but the conglomerate is still actively selling AT&T TV as a bundled complement to services like fiber-based high-speed internet, as well as a means to get HBO Max into more homes. 

AT&T has entered into exclusive negotiations to sell a minority stake in DirecTV to private equity company TPG, Reuters reported. 

The deal “could” value DirecTV at more than $15 billion, the report said. An agreement could be announced in the “coming weeks,” added Reuters, noting that AT&T is anxious to find ways of paying down nearly $150 billion in debut. 

Reuters cited “people familiar with the matter.”

Both AT&T and TPG have declined comment.

Also Read: AT&T Disappointed with DirecTV Bids, May Cancel Auction (Report)

The New York Post reported in early December that AT&T was disappointed in a number of private equity bids for its satellite TV company, some slightly above $15 billion, some below that figure.

There has been speculation that AT&T would enter into an agreement with financier Michael Klein’s Churchill Capital to spin DirecTV off through a special purpose acquisition company. 

The Post reported that AT&T had also asked TPG to "look at the books" in hopes of driving up DirecTV's selling price. 

AT&T paid $49 billion for DirecTV in 2015, a figure that swelled to $66 billion once acquired debt was factored in. Since then, DirecTV has lost more than 40% of its customers, finishing the third quarter with just 13.6 million subscribers. 

And AT&T has taken on a lot more debt, subsequently paying another $85 billion to buy Time Warner Inc. in 2018.

It’s unclear as to how much debt relief a TPG deal valuing DirecTV at around $15 billion would provide. It’s also unclear as to whether TPG would gain stakes in other AT&T pay TV assets, notably the declining U-verse platform. There had been speculation that AT&T might include that asset in a private equity arrangement for DirecTV. 

AT&T sold its Crunchyroll streaming service to Sony in December for $1.175 billion. 

With the ink barely dry on TPG’s sale of its Astound Broadband assets to Stonepeak Infrastructure Partners for $8.1 billion, Jim Holanda, CEO of Patriot Media, the company that will manage the assets for its new private equity owners, said that future growth will be fueled by a mixture of organic opportunities and possibly new deals. 

TPG agreed to sell Astound on Nov. 1, for about $3.6 billion in cash and $4.5 billion in assumed debt. The deal is expected to close in the second quarter of next year. 

In an interview Monday, Holanda said that Astound will remain focused on several core objectives under its new owners -- growing its  residential and commercial customer base, expanding its commercial and residential networks, and accretive mergers and acquisitions when they make sense. 

“We’re happy at this size,” Holanda said. “We’re the sixth largest MSO behind Comcast and Charter and Cox and Altice and Mediacom. We’re bigger than other public cable companies like Cable One and WOW. I think we have the scale we’re very comfortable with. But if there are opportunities to grow through mergers and acquisitions or organically, we’re going to continue to pursue those, because they historically have been very accretive for us and have accelerated our growth.”

Astound Broadband has more than one million subscribers and operates under the RCN, Grande Communications, Wave Broadband and EnTouch Communications brands across seven states and Washington, D.C. Holanda has been a part of the company practically from the start. Patriot was formed in 2002 by Holanda and cable Hall of Famer Steve Simmons to buy RCN’s Princeton, N.J. assets (later sold to Comcast), managed RCN and Grande Communications for ABRY Partners beginning in 2010,  and continued that role after TPG bought RCN and Grande in 2017.  From that base TPG went on to purchase Wave Broadband in 2018 and EnTouch in September. 

In an interview, Holanda said that TPG began looking at its options for Astound earlier this year, refinancing its debt in late August to take advantage of lower interest rates. At that time, the private equity firm introduced a portability structure to the debt, which made it easier for a potential buyer to assume its leverage. 

“That woke up people to the fact that there was no financing risk in purchasing the business,” Holanda said. “Obviously we have seen lots of infrastructure players now coming into the fiber and residential broadband space.”

Holanda said he didn’t know any of Stonepeak’s partners before the deal, but its reputation in the fiber business has preceded it. Stonepeak’s portfolio includes investments in Cologix, which operates data centers in the U.S. and Canada; fiber distributed network provider ExteNet Systems; and Canadian rural broadband provider Xplornet.

“Clearly there has been a lot of activity on that side and we were hoping we would be able to find an infrastructure provider with a long term view of the business as a logical next partner in our evolution,’ Holanda said. “In the months I've gotten to know Stonepeak, we’ve been very very impressed with them. They have deep conviction in the business, a great deal of knowledge given their prior investments in infrastructure and again have a very strong balance sheet in terms of their ability to allow us to grow across all of these various disciplines.”

While it has been broadband-centric for the past five years, Holanda said Astound still has a strong video presence, dating back to the integration of streaming services like Netflix and Hulu into its offerings back in 2014.

“We also have been seeing the macro trends and shifts in the business, and as content costs continue to skyrocket out of control and impact people’s budgets, we just want to give people as much optionality as possible to put together whichever package of services they are comfortable with. Holanda said, adding that the company has its own IPTV streaming platform and is currently streaming its full lineup and VOD library to RCN customers on any device in the home. Grande customers will receive that capability in the fourth quarter, expanding to Wave customers in the first half of next year. 

Private equity firm TPG said it has completed the purchase of Houston-area broadband and video service provider EnTouch. Terms of the deal were not disclosed.

TPG said EnTouch will join its other pay TV and broadband services -- RCN, Grande Communications and Wave, collectively known as Astound --  which combined have more than 1 million customers. 

The deal was first announced in February.  

“With the acquisition of EnTouch, the company will be joining the Grande Communications eco-system, which also includes RCN and Wave Broadband, allowing customers to take advantage of Grande’s higher internet speeds and streaming services,” said RCN, Grande and Wave CEO Jim Holanda in a press release. “The addition of EnTouch creates further opportunities for sustained growth in our Texas service area and continues the expansion of our reliable, robust fiber-rich network on a national scale for both residential and business customers.”

According to TPG, the addition of EnTouch expands its existing Texas presence to servicing both residential and business customers in Dallas, Austin, San Antonio, Corpus Christi, Waco, Temple, San Marcos and Midland/Odessa.

“As part of Grande Communications’ service network, we will continue to focus on providing customers with high-quality technology and customer service,” said Sam Luxton, President and CEO of EnTouch. “Together, we will offer new and improved products and services and continue to grow and innovate.”

The news comes as TPG is reportedly seeking out a buyer for its pay TV properties, valuing them at about $8 billion. 

Private-equity firms, anxious to get back into the cable broadband business just a few years ago, are considering exit strategies, with at least one big deal in the works and others in the wings, according to sources in the cable financial community.

Perhaps the biggest deal in the pipeline is the possible sale of Dallas-based private equity giant TPG’s interest in Astound, its rollup of RCN, Grade Communications and Wave Broadband. TPG, which spent around $5 billion rolling up those three overbuilders between 2016 and 2018, is seeking about $8 billion in a sale and has hired investment bankers Morgan Stanley and J.P. Morgan Chase to handle the auction, according to a Reuters report.

TPG declined comment.

Sources in the financial community confirmed the Reuters report, adding that TPG originally tried to start an auction for the properties in March, but pulled it back when the COVID-19 pandemic hit. The second round of bidding is expected to take place in the next two months, with a winner expected to be chosen early next year. 

Already, interest among larger operators is beginning to rise. On Sept. 2 Altice USA launched a $7.8 billion unsolicited takeover bid for Canadian telco Cogeco, the parent of Quincy, Massachusetts-based Atlantic Broadband. Altice USA has partnered with Toronto-based Rogers Communications, which would buy Cogeco’s telecom businesses for $4.8 billion. Altice USA would pay
$3.6 billion for Atlantic Broadband, about
10.2 times the cable company’s forward-looking cash flow. Cogeco’s controlling shareholder rejected that offer on Sept. 3, although most analysts expect Altice to raise its bid. Either way, the offer itself could mean that  valuations for other assets would start at even higher multiples.    

Riding the Broadband Wave

TPG burst onto the distribution scene in 2016 with its $2.25 billion purchase of Grande Communications and RCN and has ridden the broadband wave over the past several years, as large and small cable companies have shifted their primary focus away from video and toward faster data speeds. All three companies serve diverse geographies. Grande focuses on metro and rural Texas, and has customers in Austin, San Antonio, Dallas, Corpus Christi, Midland, Odessa, Greater Temple and Waco. Wave, which TPG purchased in 2018, focuses on Washington (including the Seattle area) Oregon and California. RCN, the largest of the three,  operates in Boston; Chicago; Washington, D.C.; Lehigh Valley, Pa.; New York and Philadelphia.

When TPG closed the Wave deal in 2018, it claimed the combined companies passed about 2.7 million homes and had 925,000 residential and business customers, delivering nearly 1.7 million data, voice and video services.

Just who would buy the TPG assets is the big question. Because of its status as an overbuilder in some of its larger markets like New York, Chicago and Boston, incumbent operators like Comcast and Charter Communications would be prohibited from buying. Midsized cable and broadband provider Cable One has been aggressively buying smaller cable companies and fiber network owners over the past three years: Emporia, Kansas-based broadband services company ValueNet Fiber; Sullivan, Missouri’s Fidelity Communications; Sikeston, Missouri-based  NewWave Communications and ClearWave Communications. But a TPG deal could be too pricey for Cable One, which paid about $735 million for NewWave and $526 million for Fidelity. The company didn’t reveal the price of the other purchases, but it is believed they were for considerably less.

 In a research note, MoffettNathanson principal and senior analyst Craig Moffett said CableOne needs to add scale to justify its high valuation, either organically or by other means. Its stock has been the best performer in the distribution sector for three years running, currently priced at nearly $1,900 per share. In the second quarter, Cable One beat analysts’ expectations by adding more than 44,000 high-speed internet customers, an 11.3% growth rate and more than double the 5.1% rise in Q1.     

Broadband is driving much of the interest in cable at the moment. According to one member of the cable financial community who asked not to be named, familiar names in the smaller cable business that had sold their systems in the past — like NewWave’s Gleason family and former Wave Broadband CEO Steve Weed — have been dabbling in companies in the fiber-to-the-home business to help address the broadband boom.

Fiber Draws Interest

“It’s been nuts,” said the cable financial executive who asked not to be named. “There’s a lot of interest in fiber-to-the-home. It’s a new chapter for overbuilders.”

Weed, who sold Wave Broadband to TPG in 2018 for $2.36 billion, formed WaveDivison Capital with former Wave Broadband executives Harold Zeitz and Wayne Schattenkerk shortly after closing that deal, and in May 2019 teamed up with Searchlight Capital to purchase former Frontier Communications properties in Washington, Oregon, Idaho and Montana with 350,000 residential and commercial customers for about $1.35 billion, renaming the company Ziply Fiber.   

At the time of the Frontier deal, Weed hinted that more deals could come. 

“We are big believers in the Northwest’s future growth opportunities and that future runs on broadband,” Weed said in 2019. “Our plan is to invest further in our markets, specifically by extending fiber to more homes and businesses, to bring them the high speeds they want.” 

Overall broadband growth has been strong and continues to be dominated by cable distributors. Leichtman Research Group estimated that cable operators added about 1.4 million high-speed internet customers in Q2, compared to 530,000 additions in the prior year. While much of that was due to work-from-home and stay-at-home orders in many states due to the pandemic, Leichtman Research president Bruce Leichtman said in a press release that the increase was the largest since 2008. Some believe the momentum
will continue. λ

Private equity firm TPG has hired investment bankers Morgan Stanley and JP Morgan Chase to shop its overbuilder unit Astound, which includes its interests in RCN, Grande Communications and Wave Broadband, according to reports.

Reuters said Monday night that TPG hired the bankers and was looking at a valuation of the overbuilder that would top $8 billion, including debt.

TPG pieced together Astound through a pair of acquisitions over the past four years. It purchased RCN and Grande Communications in 2016 for $2.25 billion and Wave in 2018 for $2.36 billion.  All together, the properties offer pay TV, broadband and telephone service in eight states to about 1 million customers.

TPG declined comment.

The news comes as AT&T is attempting to sell a majority interest in its DirecTV satellite unit and other traditional operators are making moves to expand their broadband reach into more rural areas. 

Broadband growth has been especially robust in the COVID-19 era, and smaller operators may want to capitalize on that growth. But finding a buyer with the required financial muscle to wrestle a deal of this size could be tricky. Because many of its properties are overbuilds of incumbent providers, that would mean operators that have systems nearby like Charter, Comcast and others, would be prohibited by federal regulations from doing a deal. And while Cable One has purchased smaller operators in the past like NewWave Communications, Fidelity Communications, Clearwave  and ValueNet, this deal could be a little price for its tastes. 

Still, broadband growth has been strong and has shown little signs of slowing down. According to Leichtman Research Group, cable operators added about 1.4 million broadband customers in Q2, up from 530,000 additions in Q2 2019. 

TPG Growth, the growth equity unit of investment firm TPG, has partnered with John Malone’s Liberty Global to form a television production and distribution studio, Platform One Media.

TPG said it will fund its investment through Evolution Media, an investment partnership with CAA and Participant Media. Liberty Global will initially take a minority stake in the partnership. Additional terms were not disclosed.   

Platform One Media will curate, develop, produce and distribute scripted programming for the U.S. and international markets. Veteran television executive Katie O’Connell Marsh, former CEO of Gaumont Television, has been appointed CEO and will be spearheading the company’s activities.

“TPG Growth has a history of identifying and building companies, such as STX Entertainment, that can redefine their categories,” said TPG Growth founder and managing partner Bill McGlashan in a statement. “Working with our partners at Evolution Media, we look forward to leveraging our collective experiences and networks in the entertainment space to build this business with Katie and her team.”

While at Gaumont, O’Connell Marsh developed and produced drama series including NBC’s Hannibal, the Golden Globe-nominated Netflix series Narcos, and Hemlock Grove for Netflix. On the comedy front, she developed F Is for Family for Netflix and Gaumont, as well as the Emmy-winning 30 Rock while at NBC and the Emmy-winning Arrested Development during her tenure at Imagine.

Most recently, O’Connell Marsh was Head of Global Live Action Television for Dreamworks Animation, where she was tasked with launching the live-action television operation for the company.

Additional appointments to the Platform One Media executive team include:

• Courtney Conte, who most recently served as president of Slingshot Global Media, will be chief operating officer (COO) and president. Conte previously served as COO of BBC Worldwide Productions and co-president of Carsey-Werner. He has developed and produced numerous television series for Universal, Disney, Warner Brothers, Fox, NBC, ABC, CBS, UPN, The WB, BBC, HBO, Showtime, Nickelodeon and Lifetime.
• Elisa Ellis, who most recently served as the Head of Creative for the Live Action Television division of Dreamworks Animation, will be joining as chief creative officer. Before joining Dreamworks in 2016, Ellis was president of creative affairs & production for Gaumont Television. At Gaumont, she was responsible for overseeing all aspects of the company’s series development and production including Hannibal and Narcos.
• Erik Pack will join Platform One Media as head of distribution & co-production based in London. Pack most recently served as President of International Distribution & Co-production at Gaumont Television. Prior to that, Pack was executive vice president of International Sales and Co-Productions at Power, a London-based production and distribution company. Previously, Pack was at Hallmark Entertainment for 12 years, where he structured output deals across Europe and Latin America.
• Neil Strum, who most recently served as head of business and legal affairs for Slingshot Global Media, will take on the same position at Platform One Media. Prior to Slingshot, he served as Executive Vice President at Metan Development Group, one of the only Western companies producing original TV content in China. Strum also served as senior vice president of the William Morris Agency where he forged new business models utilizing non-traditional financing for network production.
• Also working with the team is Julia Franz, former head of creative at ABC Studios, who will serve as a consultant for the new company.

"Platform One Media has the key ingredients Liberty Global values in a strategic asset: great leadership, a clear vision and aligned, well capitalized partners,” said Liberty Global choef programming officer Bruce Mann in a statement. “It also gives us the opportunity to work with world-class talent creating high-quality scripted programming which could potentially feature on Liberty Global’s pay-TV platforms in Europe. We are fortunate to have Katie O'Connell Marsh bringing her vision, drive and creative track record, and to be working with TPG Growth, who we view as a natural strategic partner.”

As part of its launch, Platform One Media has acquired the portfolio of development projects from Slingshot Global Media and retired the Slingshot brand.

TPG has been very active in the cable space recently, purchasing overbuilder RCN and Grande Communications in August 2016 for $2.25 billion and Wave Broadband in May for $2.4 billion.

“The explosion of original content globally is creating an opportunity for new, innovative, and diverse ways to engage audiences beyond the series itself,” O’Connell Marsh said in a statement. “With Platform One Media, and our partners TPG Growth and Liberty Global, we are perfectly positioned to develop and distribute compelling narratives that are artistic, meaningful and addictive by working closely with innovative, inspiring talent to bring to life their creative visions."

It's official: Private equity fund TPG Capital announced Monday it will buy RCN Telecommunications and Grande Communications for $2.25 billion.

TPG is acquiring them via separate transactions – from ABRY Partners for $1.6 billion and $640 million, respectively, and plans to combine those assets to create a top ten U.S. cable operator.

Additionally, TPG said it’s partnering with Patriot Media, a management team headed by Steve Simmons and Jim Holanda that have managed RCN and Grande since 2013.

Under that partnership, Patriot Media “will continue to make significant investments in the network and in technology that will enable RCN and Grande to expand Gigabit per second high-speed data services, creating the premier internet experience in their markets,” they said. 

TPG said the deal expands on its strategy of identifying and partnering with companies at the forefront of thriving and evolving industries, citing investments in sports and entertainment intermediary CAA; Cirque du Soleil; online education platform Lynda.com; Spotify; Univision; Airbnb, Ipsy, RentPath, and Uber.

TPG and ABRY expect to close the deal in Q1 2017.

The Wall Street Journal reported that the deal would be announced as soon as Monday.

RCN and Grande, operators that have both leaned on TiVo-powered video platforms, together serve Austin, Texas; Boston; Chicago; Dallas; Lehigh Valley and other areas of Pennsylvania; New York; San Antonio; and Washington, DC.

TPG was advised on the deal by PJT Partners, UBS, Cleary Gottlieb, and Deloitte. ABRY, Patriot Media, RCN, and Grande were advised by Credit Suisse, Kirkland & Ellis, Locke Lord and PwC.

Update: “We believe that Grande has been on the market for some time, and that as part of the process TPG convinced Abry to sell RCN as well, JP Morgan’s Philip Cusuick and Eric Pan said in a note issued Monday, citing SNL Kagan data that RCN has about 289,000 video subs, alongside Grande’s 88,000.

They said the sale price of $2.25 billion compares to the 2015 EBITDA of $192 million at RCN and $76 million at Grande, and believe that the deal is about 8.25x TTM EBITDA.

“While this is substantially lower than the 8.8x EBITDA that Altice paid for Cablevision or 9.1x that Charter paid for TWC, RCN is also a cable overbuilder so likely has fewer potential buyers,” they said, adding that they don’t believe TPG expects much  by way of synergies in the deal. 

“Given RCN’s presence in the New York area and Grande’s in Texas we would expect that Altice/Cablevision (New York overlap) and Charter (New York and Texas overlap) were not likely to be bidders,” they added. 

Private equity firm TPG is reportedly close to a deal to purchase RCN and Grande Communications in a deal worth $2.25 billion.

According to a report in the Wall Street Journal, a deal could be announced Monday.

The Journal said that in addition to TPG, which owns other digital media investments like Univision Communications, Spotify and STX Entertainment, Google Capital, the investment arm of Alphabet Inc. is taking a minority stake in the deal.

Overbuilder RCN was sold to Abry Partners in 2010 for about $1.2 billion. RCN has about 289,000 customers in parts of Boston, Chicago, Lehigh Valley (PA), New York City, Philadelphia (Delaware County) and Washington, DC. Grande Communications was launched about a decade ago and has recently concentrated on its high-speed Internet business, and has made moves to deploy 1-Gigabit service in some of its markets. According to its web site, Grande serves more than 160,000 customers in larges and small communities in Texas, including Dallas, San Antonio and Austin.