AT&T’s decision to sell a minority interest in DirecTV to TPG Capital didn’t come as a surprise, it had been expected for months as the phone company let small details around the deal trickle out beginning last year. But the deal, where TPG Capital will get a 30% interest in DirecTV, virtual MVPD AT&T TV Now and IPTV service U-verse for $7.8 billion, had analysts searching for meaning behind selling what was once the premier pay TV asset for about a quarter of what it paid for it seven years ago. 

The TPG deal values DirecTV, once the scourge of every cable operator and the largest multichannel video programming distributor in the country, at $16.25 billion (after it paid, including assumed debt, $66 billion for the asset in 2015). Enough has been said about how since AT&T bought DirecTV, it has nearly sucked the life out of the satellite giant, how it has lost nearly 10 million customers, its relevance as a brand and its heart as the gold standard for customer service and quality. Put those thoughts on the shelf for a minute. What the deal shows, according to some analysts, is that AT&T, seeking a way, any way, to pay down the debt it has accumulated over the past six years through the DirecTV buy and its $100-plus billion purchase of Time Warner Inc. -- has again been taken advantage of in the TV space.

Granted, DirecTV is a declining asset -- it has lost bucketsful of subscribers over the years and in the broadband era, its product can’t really compete with cable operators with two revenue streams and  the streaming services that appear to have taken over the TV business. But, c’mon, did it really have to end like this?

In an email to clients, MoffettNathanson principal and senior analyst Craig Moffett, long a critic of AT&T’s purchase of DirecTV in the first place, wrote that the TPG deal serves the purpose of removing the satellite company’s dismal financials from the phone company’s books. But that’s essentially where the benefit ends. 

“In short, what they’ve really done is buy the right to lock DirecTV in the basement in the hope that no one remembers it’s down there,” Moffett wrote.  “It will surely no longer be mentioned when AT&T reports earnings.”

The “bewilderingly complex transaction,” according to Moffett, will basically give AT&T some extra cash ($1.8 billion from TPG), a vehicle in the spun-off entity to raise debt ($5.8 billion) and control of an asset it doesn’t care for. 

And the ultimate irony is that the deal doesn’t actually reduce AT&T’s leverage, it increases it. According to Moffett, the $7.8 billion used to pay down debt is offset by the loss of $3 billion in cash flow from DirecTV. So in real numbers, AT&T leverage ratio climbs from 4.1 times cash flow to 4.2 times when the deal closes in the second half of this year.  

The deal may be complicated, but Moffett said one thing is glaringly obvious.

“This much is clear,” he wrote. “ AT&T’s DirecTV is inarguably one of the worst acquisitions of all time.”   

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

In a research note, Barclays Group media analyst Kannan Venkateshwar noted that AT&T has said that it expects about $1 billion in annual free cash flow starting next year from the spin-off. While the structure is complicated -- he added that it isn’t clear how AT&T will split the $4 billion in DirecTV free cash flow (70/30 or 50/50) -- if TPG gets in the neighborhood of the $1 billion AT&T expects, the returns on its $1.8 billion cash investment will be rather large in a very short period of time. Remember, that according to the deal terms, TPG is contributing $1.8 billion in cash and assuming about $6 billion in debt as part of the deal. Curiously, that amount is pretty close to the $8.1 billion TPG received in its sale of Astound Broadband, the 1-million subscriber cable operator (RCN, Grade Communications, Wave Broadband and enTouch) it sold to Stonepeak Infrastructure Partners last year. 

Venkateshwar was one of many analysts who pointed out that the deal appears to favor TPG more -- in another research note, Evercore ISI Group analyst Vijay Jayant wrote that determining whether the sale was good for AT&T is “Complicated”. But the Barclays analyst deal hinted that the TPG deal is so bad for AT&T that it just has to have an angle that maybe others are missing. 

Also Read: AT&T: Taking a Mulligan on Media 

In his note, Venkateshwar said that the deal is interesting because it hits almost none of the metrics usually associated with such deals -- it’s free cash flow dilutive, it doesn’t really reduce AT&T’s debt that much (about $200 million) and allows AT&T to “lose strategic control” over one of its biggest cash cows. To make matters worse, he wrote that the leverage on the new company is a lot lower than what investors would normally expect from a private equity deal.  

“A skeptical read could be that the decision to sell despite the low valuation, the inability to hit financial deal objectives, and the unusually low leverage are all likely due to more structural risk than investors may have anticipated in AT&T,” Venkateshwar wrote. “However, in our opinion, the unusual structure could imply that the transaction is potentially just the first phase of a more comprehensive transaction. It is also possible that it is a combination of both.”

Venkateshwar suggested that TPG might be able to work better behind the scenes toward a Dish merger, adding that the synergies of such a deal could boost AT&T’s economics at some point in the future. 

“This would also explain the decision to put a low leverage on the asset as the combined company could have significant synergies which can then be levered up more efficiently to drive much higher returns for all counterparties,”  Venkateshwar wrote. “Therefore, while the initial read for AT&T from the announcement seems to be negative, we think there could be more to the deal than meets the eye.”

On a conference call with analysts to discuss the deal on Feb. 25, AT&T CEO John Stankey didn’t want to comment on the merger potential of the deal. 

“There are a lot of different terms and conditions in it  [the TPG deal] and a lot of different scenarios that might be out there that I’m not going to talk about or fill in the public on,” Stankey said on the call. “Generally speaking, we remain a participant in any future value that gets created as a 70% owner of this entity. If something else occurs, we get 70% of the value and our partner gets 30% of the value as a general rule. Both parties are incented to try to create more value because it’s good for our investment and our structure moving forward. That’s the simplest way to think about it. ” 

The concept of the combination of DirecTV and Dish is nothing new. But even though the climate has changed, and the fact that the only two satellite TV companies in existence are both struggling, regulators are apparently no more open to a combination now than before. As recently as October, under a Republican administration mind you, the Dept. of Justice was reportedly sending messages that they would not allow a merger to take place. With a current Democratic administration not necessarily keen on making even struggling rich guys richer, chances of a deal happening can’t be much better. 

Dish chairman Charlie Ergen has said the merger of Dish and DirecTV is “inevitable,”  adding that the satellite business is a declining asset and that putting the two together would ensure their health. 

“Make no mistake, whether it’s a year from now or 10 years from now, I believe it’s inevitable those companies go together,” Ergen said during Dish’s Q3 conference call in November. 

To me, putting together two companies in an industry that has passed them by isn’t a solution, it’s procrastination. Together the two may have some cost synergies and additional scale, but the satellite TV business is still going to die. A Dish/DirecTV merger would only prolong the inevitable demise of both companies. 

In an August research report, Moffett estimated that merging with Dish would only improve the combined company’s subscriber erosion to 15% per year. And Moffett added that with Charter and others planning to increase rural broadband buildouts, the picture is even gloomier.

“If we see a huge post-COVID stimulus/infrastructure bill next year targeting broadband expansion, as seems likely, then the defensible rural segment will all but disappear,” Moffett wrote in the August note.

So, perhaps the reasoning behind the deal is really as simple as a company that realized it got into a bad business at an even worse time and just wanted out. In opening up the conference call on the deal Feb. 25, Stankey said " We didn't expect this outcome when we closed the DirecTV transaction in 2015, but it’s the right thing to do."

Or maybe, as a slightly older, wiser sage once put it, there is no why.

TPG Capital has completed its previously announced purchase of Wave Broadband, a $2.36 billion deal that creates the sixth largest cable operator in the country.

TPG, which also owns RCN and Grande Communications, first announced the Wave deal in May.

“By combining RCN/Grande and Wave, we are creating a leading, national-scale internet provider and cable TV operator with significant growth potential,” RCN/Grande CEO Jim Holanda said in a statement. “We are pleased to announce the close of this transaction, and look forward to our continued growth led by a strong focus on customer service and commitment to providing the highest quality high-speed internet, TV, and voice services available.”  

The combined companies have a presence in seven of the top 10 DMAs and have nearly 950,000 voice, video and data subscribers.

Wave will continue to operate as a branded entity headquartered in Kirkland, Wash., serving business and residential customers in Washington, Oregon, and California. RCN provides similar services as Wave along the East Coast and in Chicago; Grande operates throughout Texas.

“Together, RCN/Grande and Wave create a market-leading broadband platform with national reach,” said TPG partner David Trujillo in a statement. “The combined platform is providing businesses and residents across the country with fast, high-quality, and reliable communications services that allow them to rapidly access the content they crave. We look forward to our continued work with the RCN/Grande and Wave teams.”

TPG Capital’s agreement to buy Wave Broadband for a robust $2.36 billion could have some over-the-top implications going forward, according to the man who will be running the combined companies once the deal is closed later in the year.

RCN CEO Jim Holanda said once the deal is completed Wave will be incorporated into the RCN family, along with Grande Communications in Texas.

Wave, with about 138,000 video customers and access to more than 600,000 homes passed, has carved out a strong business in the Northwest. It offers cable and telecom services in the suburbs of top markets in the region like Seattle and Portland, and in metro areas it offers a commercial phone and broadband package with speeds of up to 1 Gigabit per second. The company has been piggybacking residential service on that commercial network in some metro areas, offering a 1 Gbps broadband-only service to apartment buildings.

That service, called Wave G, has been popular especially with millennials, says Wave founder Steve Weed, who will stay on as a member of the RCN board of directors once the deal closes.

Weed added that with Wave G, the company decided to promote “OTT video to customers rather than launching our own cable service. We’ve been pretty successful at it. We found that customer penetrations are just as good when you don’t have cable and customer satisfaction is very high.”

RCN and Grande CEO Jim Holanda, said after the deal is closed, RCN may look at providing cable to the metro markets down the road, but for the time being it is comfortable with offering a competitive broadband product in larger markets.

“That’s not much different from what we do in downtown Manhattan and downtown Chicago and downtown Austin, Texas in terms of the gigabit services we’re providing to customers,” Holanda said. “I think opportunity abounds and we continue to look at where we have a strong competitive advantage to continue to try to take advantage of that.”

And as the industry starts to move toward smaller video packages – so-called skinny bundles – RCN and Wave could have a solution for that too.

“Taking a broadcast level of service and pairing with a TiVo and then paring that with over the top options like a Sling TV and a Netflix, all of a sudden a customer has a very robust lineup – it has live TV, it has live sports, it’s got streaming, it’s got binge watching with thousands of hours of content,” Holanda said. “It can be a pretty powerful value proposition. We’re trying to keep a foot or a toe in each of those to try and take care of what our various customers want. We make our decisions based on what our customers are telling us and what they want. “

But he said it is unlikely that ARCN would try to launch an out of footprint OTT service.

“Long term strategically speaking, our company with 900,000 total customers and less than that in terms of video customers, having an OTT service that goes to a large group of people outside our footprint, we simply don’t have the size to play in that space,” Holanda said.

Although lumped in with other overbuilders – aside from a small part of the San Francisco market where it competes directly with Comcast – Wave is generally the incumbent cable operator in its regions. Cable is the operative word, however. Weed said in an interview that Wave’s strategy has been to focus its cable service on suburban markets outside of larger cities. But for commercial broadband, anything goes.

“The metro markets where we serve in Seattle and Portland and now Sacramento are pretty extensive, but that’s not where our cable footprint is; it’s our metro fiber,” Weed said. “We have a large competitive network in Seattle, Portland and Sacramento that is commercial enterprise fiber network, not the residential footprint. It’s really two different areas.”

The commercial side of the business has been booming, and Wave has been aggressively acquiring data centers and ISPs over the past few years to bolster that offering. The combination with RCN will only make that product stronger, Weed said, adding that in the past, if a commercial customer needed to connect offices outside of Wave’s Northwest footprint, they were out of luck.

“If any of those customers had facilities on the East Coast or Chicago or Texas, we had to say we can’t do that,” Weed said. “Now that opens up the market for us. Going forward there will be an opportunity to have more of a national product offering that we don’t really have today.”

Holanda added that Wave’s fiber-rich network also will help bolster the back-haul business with wireless carrier, especially as they begin to deploy 5G networks that depend on small cell sites connected with high-capacity lines.

“Whether it’s co-location, whether it’s back-haul, carrier or enterprise, there’s going to opportunities across all of this that play well for people that need national solutions,” Holanda said. “As we think about small cell that needs to get built out over the next five to eight years, that small cell infrastructure needs fiber deep in the neighborhoods.”

Holanda said when Wave and RCN built their respective networks, it was with three times the fiber of a traditional cable operation, which should give it a leg up on competitors.

As part of RCN – all three companies (Wave, RCN and Grande) will remain under the same corporate umbrella but retain their brand names in their markets --

Wave’s has invested heavily in fiber for its network – in September it raised another $125 million for the buildout and had initially raised $130 million for the project a year earlier.

This is TPG’s third cable purchase in about a year – it bought RCN and Grande in August for $2.25 billion – but it probably won’t be the last, according to Holanda. Prior to the recent cable buys, TOG has mainly focused on content and connectivity, investing in internet music service Spotify, broadcaster Univision Communications, travel website Hotwire and TV and movie studio STX Entertainment, among others.

“They are obviously very formidable with a lot of capital at their disposal given how big they are,” Holanda said of TPG. “I think they are very bullish on the infrastructure space clearly as are we as well as the content space. I think you’ll continue to see them potentially play on both sides.”

TPG Capital has agreed to purchase Seattle-based Wave Broadband in a deal valued at about $2.36 billion.

News that a deal was close was first reported by Reuters.

TPG has been on an acquisitions tear of late. In August it paid $2.25 billion for Grande Communications and RCN. 

Wave’s owners Oak Hill Capital Partners and GI Partners had hired investment bankers in April to seek out a buyer for the company. At the time they were reportedly seeking $2 billion.

Wave has about 138,000 video customers in Washington State and Oregon – including Seattle and Portland – and overbuilds Comcast in parts of San Francisco. The company has concentrated on its broadband service and has recently focused on purchasing fiber and data companies to boost its high-speed data presence, including Seattle-based CascadeLink.

In September the company raised about $125 million to continue an ambitious fiber buildout geared toward serving enterprise customers. 

Oak Hill and GI Partners teamed up with Wave management – including founder and CEO Steve Weed – to buyout long time backer Sandler Capital Management in 2012 in a deal some valued at about $950 million.

Wave said the new deal will create the sixth largest internet and cable operator in the country. The transaction is expected to close in the fourth quarter of 2017. Wave will be combined with TPGs’ RCN operations, according to the announcement.

“Over the last several years we have accelerated our growth substantially by expanding from our heritage of residential broadband services into enterprise grade fiber,” said Wave founder and CEO Steve Weed in a statement. “We are excited that our new partners in TPG and RCN recognize the value of what we have created, and share our passion for creating happy customers – we are eager to enter our next era of growth alongside them.”

Wave will continue to operate as a branded entity headquartered in Kirkland, Wash., serving business and residential customers in Washington, Oregon, and California. RCN provides similar services as Wave along the East Coast and in Chicago; Grande operates throughout Texas.

The company said it will continue to grow its residential customer base while also accelerating expansion of its fast-growing commercial and enterprise business segments that have driven much of its recent momentum.

“At RCN and Grande, we pride ourselves on providing the best products, best service, and best value to our customers. Through our partnership with TPG, and by expanding our footprint with Wave, we are creating a market-leading broadband platform with national reach, broad capabilities and expertise, and exciting growth potential,” said RCN and Grande CEO Jim Holanda in a statement. “We’ve known the team at Wave for many years, and their focus on delivering value to their customers aligns perfectly with ours.”

Wave management will remain significant investors, partnering with majority owner TPG. Wave’s CEO, Steve Weed, will join the combined company’s Board of Directors.

TPG Capital’s surprise $2.25 billion purchase of over-builder RCN and small Texas-based cable operator Grande Communications could signal a new wave in the cable M&A space: new entrants that are laser-focused on broadband and the potential to offer over-the-top and short-form video services, rather than stodgy old pay TV.

TPG, which is paying $1.6 billion for RCN and about $650 million for Grande, is teaming up with Google Capital, the investment arm of the Internet search conglomerate, on the deal. It’s expected to close in the first quarter of 2017.

Google Capital is taking a minority financial interest in the deal, but at least initially there is no mechanism for the company to increase that stake.

The relatively high price surprised some members of the financial community: At 8.4 times cash flow for RCN and 8.6 times for Grande, the deal is valued nearly on par with the Charter Communications’s $78.7 billion buy of Time Warner Cable and Bright House Networks (9.1 times). It seems to place a premium on pay TV providers for their broadband infrastructure, rather than their video businesses.

As TPG Capital partner David Trujillo noted in announcing the deal: “High-speed data has become, and will remain, the essential connection for both consumers and businesses.”

That mindset is not new, and operators such as Cable One and Wave Broadband have been de-emphasizing video for years. But it could bode well for smaller operators that have been forced to concentrate on high-speed data as programming costs have skyrocketed.

“This is likely the beginning of a mini-boom,” said Garrett Baker, founder of Garrett M. Baker Advisors, LLC, who has advised on dozens of large and small cable deals over the years. “Many private operators are finally deciding, ‘This is my big chance to get out.’ ”

RCN and Grande are in similar straits as the rest of the industry: They’re watching their video customer base decline as younger viewers migrate to over-the-top services and skinny bundles for their entertainment needs. Like many other operators, both have put a greater emphasis on their broadband business, providing the pipe for those smaller content packages.

While Grande has had a higher profile — it has moved to launch 1 Gigabit-per-second service in Austin, Dallas and San Antonio, Texas, three markets where Google Fiber has expressed interest — RCN has maintained its broadband presence, offering services ranging from 10 Megabits per second to 330 Mbps in its markets.

While RCN has basically been managed for cash flow since Abry purchased it in 2010 and was not initially marketed with Grande for sale, it has been growing broadband customers organically and was the property that drew TPG’s interest.

“Grande is a little too small to build a platform asset,” said one source in the cable community familiar with the company.

TPG is expected to continue to test the deal waters after it closes the RCN-Grande deal, sources familiar with the company said this transaction will do for the time being.

“I’m sure they’d love to do more,” said one source in the cable financial community. “But this deal can stand on its own.”