AT&T; to Sell Back Its Stake in DirecTV

In the latest telephone company retreat from the television business, AT&T; said Monday it would unwind its partnership with DirecTV and sell its 2.5% equity stake back to the El Segundo-based satellite service at a profit.

Analysts have speculated for more than a year that the partnership was not functioning as expected. When the alliance was struck in March 1996, AT&T; was expected to bring in subscribers by marketing the service to its long-distance customers.

While DirecTV says the phone company increased awareness of the nascent service, AT&T; signed up only 35,000 new customers. DirecTV is the nation’s leading satellite television service, with more than 3 million customers.

“Everyone was disappointed,” said Eddy Hartenstein, president of DirecTV, a unit of Hughes Electronics Corp. “This formalizes what has been a nonworking relationship for the last six to nine months.”

Under the terms of the break-up, DirecTV will pay AT&T; $161.8 million for its stake--a 17% return over about 20 months. That’s far better than most regional telephone companies have done in the television business. Pacific Telesis, for example, has spent more than $500 million to enter the television business and is now trying to unload its operations.

When AT&T; invested $137.5 million for 2.5% of DirecTV and an option to raise its stake to 27.5%, analysts and Washington regulators envisioned a hotly competitive landscape in which telephone companies and cable carriers battled head-on in each others’ businesses, bundling television, telephone and Internet services for customers in one tidy monthly bill.

One of the first deals to be announced after Congress deregulated the telecommunications industry in February 1996, AT&T;’s investment valued DirecTV at a stunning $5.5 billion, despite the uncertain future of satellite television and questions about how long its losses would persist.

Launched in 1994, DirecTV is expected to lose more than $125 million this year on revenues of more than $1 billion.

Analysts speculate that both partners will now pursue other growth strategies, with DirecTV perhaps striking up relationships with regional Bell operating companies that have local teams equipped to handle sales, installation and service of its accounts.

As a long-distance provider, AT&T; lacked such resources and found that selling a complicated, new high-tech service by phone was problematic.

“Customers wanted to see, feel and kick the tires, and usually went down to their local electronics retailers to check it out,” said Mark Siegel, a spokesman for AT&T.;

“This frees both of us up for the future,” said Hartenstein. “Uncoupling with AT&T; allows us to hook up with someone else.”

Sources said AT&T; has had discussions with several cable operators about alliances and possible equity investments. However, the company this week denied speculation that it might invest in the At Home online service jointly owned by several cable operators.

DirecTV has had discussions since its formation in 1994 with various local phone carriers, and has an alliance with Cincinnati Bell. The satellite service has also had discussions with studios about exclusive programming arrangements and is expected to announce a pay television deal with Warner Bros. studios at the Western Cable convention being held in Anaheim this week.