In September 2011, Brazil’s government passed a law that is expected to expand pay-TV services in the country.  According to the new law, local telephone companies and foreign players will be able to offer pay TV services along with mobile, fixed line and broadband.  This was not the case till now and phone companies had to bundle their service with existing pay-TV providers. What this essentially means is that the new law will spur the growth of pay-TV competition in Brazil, a significant market in Latin America for DirecTV (NASDAQ:DTV). While DirecTV has done better than its counterparts such as Dish Network (NASDAQ:DISH) and Comcast (NASDAQ:CMCSA) in the U.S., it has smartly tapped into the big potential that the Latin American market offers. However, with this new bill, the company’s fast paced expansion may be at threat, at least in terms of profits.
We estimate that Latin American business constitutes about 27% to DirecTV’s total value. In addition to this, Brazil accounts for 60% of DirecTV’s Latin American revenues. 
Assuming cost metrics are similar across geographies, Brazil roughly accounts for about 16% of DirecTV’s value, thus being an important market. Any changes in the regulatory system or market competition here are likely to impact DirecTV materially. An increase in competition can force DirecTV to spend more to acquire customers hurting profitability. This could further translate in higher capital expenditures than we forecast, resulting from capitalizing the costs of set-top boxes, and lower margins resulting from higher subscriber acquisition costs.
Our price estimate of $53.26 for DirecTV, implies a premium of more than 20% to the market price.Notes:
- Brazil president signs new pay TV bill into law, Total Telecom, Sept 13 2011 [↩] [↩]
- DirecTV Looks To Brazil For Big Gains; Rivals Loom, Investors.com, Dec 15 2011 [↩]