Telecom major AT&T (NYSE:T) is in talks to acquire satellite-TV provider DirecTV (NASDAQ:DTV) for about $50 billion, according to multiple media reports.   The reports also suggest that DirecTV could continue to run under its present management, led by CEO Michael White, operating as a unit of AT&T.
Talks between the largest telco and the largest satellite-TV provider in the U.S. are the latest signs of consolidation in the telecom, cable, broadband and satellite market. If the deal does occur, AT&T will be able to rapidly expand TV services along with its wireless and broadband services, which could help it better bundle its products to customers. It would be banking on a “quadruple-play” bundle of mobile, fixed-line, broadband and TV to bring growth back to DirecTV’s business, as well as help convince DirecTV customers to switch to AT&T for mobile, as the bundled packages would likely offer competitive pricing. The fact that AT&T will be able to offer four bundled services, compared to the three (fixed-line, broadband and TV) offered by the Comcast (NASDAQ:CMCSA)- Time Warner Cable (NYSE:TWC) behemoth, could also provide it a significant competitive advantage.
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AT&T could also utilize DirecTV’s significant cash flows to expand its broadband infrastructure facilities, and there would likely be substantial cost savings because of business synergies with DirecTV. This deal makes significant financial sense for AT&T, though it also makes sense strategically despite the fact that DirecTV is not quite the growth business it was a few years ago. While it may have made more strategic sense to target Dish Network (NASDAQ:DISH) given its massive spectrum holdings, that likely would have been difficult to pull off for a variety of reasons, including regulatory issues pertaining to such a massive spectrum acquisition.
Comcast’s acquisition of Time Warner Cable earlier this year has likely accelerated the consolidation process in the industry. Some sources close to the matter suggested that the AT&T-DirecTV deal could be agreed upon very soon, but uncertainties still surround the deal price and a potential break-up fee. However, media reports suggest that both parties could agree on a per-share price of $95-100 for DirecTV, which would value the company’s equity at around $50 billion. The actual deal price is likely to depend on the mix of stock and cash in the buyout.
We have a $37.50 price estimate for AT&T, which is slightly ahead of the current market price.
Impact On DirecTV’s Business
DirecTV has posted solid results over the past few years in terms of subscriber growth and average revenue per user (ARPU), consistently outperforming most competitors. However, the growing availability of online content as an alternative video platform, along with an expanding market for connected devices, has negatively impacted DirecTV as well as the entire pay-TV industry in the country. This led to a stagnation in subscriber growth, forcing pay-TV companies to look at other avenues to register revenue gains. Cable companies effectively offset their video subscriber declines by selling high-speed broadband services, but satellite-TV providers such as DirecTV could not follow suit because of speed constraints in satellite-based broadband. Its deal with AT&T could provide DirecTV the broadband channel they have been looking for.
Cash-Stock Mix In The Deal
Raising debt is likely to be cheaper for AT&T than issuing equity, in terms of cost of debt vs. cost of equity, so we expect that the company will try to raise as much debt as possible (while trying to protect its credit rating) and issue equity for the remaining amount. AT&T will need to maintain a Net Debt to EBITDA (Earnings before interest, taxes, depreciation and amortization) ratio of below 2.5 to avoid a possible downgrade. 
Although the deal makes sense for both companies, there are lingering doubts with regard to regulatory approval. Comcast’s deal with Time Warner Cable has yet to be approved, and there have been several concerns over issues of anti-competitive practices in the deal. With respect to the AT&T-DirecTV deal, the Justice department’s antitrust division is likely to look into anti-competitive and neutrality issues, while the Federal Communications Commission will determine its implications on consumers. Past experiences of disapproved deals, such as DirecTV-Dish Network and AT&T-T Mobile, show that the approval process can be difficult. ((Is It Consolidate or Die for TV and Broadband Companies?, Wallstcheatsheet.com, May 13 2014))Notes:
- AT&T Said in Talks to Buy DirecTV for About $50 Billion, Bloomberg, May 13, 2014 [↩] [↩]
- AT&T Could Strike $50 Billion Deal for DirecTV, WSJ, May13 2014 [↩]