AT&T Inc. agreed to sell a stake in its pay-TV unit to private-equity firm TPG and carve out the struggling business, pulling the telecom giant back from a costly wager on entertainment. The transaction would move the DirecTV and AT&T TV services in the U.S. into a new entity that will be jointly run by the new partners. AT&T will retain a 70% stake in the business. TPG will pay $1.8 billion in cash for a 30% stake.

The deal values the new company at $16.25 billion with about $6.4 billion of debt. That is well below the $49 billion—about $66 billion including debt—that the Dallas company paid to buy the international satellite operator DirecTV in 2015. AT&T recently struck $15.5 billion of value off the unit, reflecting the service’s dimmer prospects.

AT&T said it would get about $7.8 billion in cash from the transaction to help pay down debts. Those proceeds include $5.8 billion that the new company will borrow from banks and pay back to AT&T.

AT&T will be able to stop including results from its U.S. video operations in its consolidated financial reports. The telecom company also agreed to cover up to $2.5 billion in losses tied to DirecTV’s NFL Sunday Ticket package.

Bidders including TPG and its rival Apollo Global Management Inc. had been jockeying for the business since The Wall Street Journal first reported on the sale process in August.

AT&T bought DirecTV near the peak of the pay-TV market before cord-cutting upended the sector. Netflix Inc. had about 75 million subscribers world-wide, far below the more than 200 million subscribers it serves today. Cheap channel bundles costing $30 a month or less hadn’t yet pierced the market.

“The disruption in pay TV did exceed our original expectations,” AT&T finance chief John Stephens said in an interview, adding that the satellite-TV business had helped generate cash for the company even as its customer base declined. Mr. Stephens said the new ownership structure is “a very attractive transaction, getting TPG’s expertise and that upfront cash payment.”

AT&T said the new venture, to be called DirecTV and based in El Segundo, Calif., and Denver, is expected to keep substantially all employees who currently support its U.S. operations and that customers’ service wouldn’t be affected. The unit generated more than $28 billion of revenue last year and had 17.2 million customers.

Todd Horwitz Chief Strategist
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