Putting an end to the speculation, AT&T (NYSE:T) announced an agreement to acquire satellite-TV provider DirecTV (NASDAQ:DTV) in a stock and cash deal for $95 per share. The purchase price implies a total valuation of $67.1 billion for DirecTV including net debt of $18.5 billion. This deal is reflective of the evolution currently underway in the telecom, TV and broadband industry as consumers find new ways to experience programming, and their viewing preferences change.  ((AT&T to Acquire DIRECTV, Press Release AT&T, May 19 2014))
In the related press release, AT&T said that the deal will enable it to become a leader in content distribution across various platforms including mobile, broadband and TV. In addition to the strategic benefits, AT&T was likely drawn to DirecTV’s significant cash flows, and there would be substantial cost savings because of business synergies with the satellite-TV major. The companies expect cost synergies of over $1.6 billion annually after three years of the deal closing, primarily on account of the increased scale of their video subscriber base.  Additionally, DirecTV’s established satellite-TV business in Brazil could provide AT&T a head start in entering the lucrative and high-growth Latin American pay-TV and broadband market. The deal is subject to regulatory approval by the Justice Department and the Federal Communications Commission (FCC), which is expected to take as much as a year.
We have a $37.50 price estimate for AT&T, which is slightly ahead of the current market price.
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Strategic Benefits To AT&T
The deal will provide AT&T an opportunity 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 the telecom major 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.  
AT&T’s acquisition of DirecTV could also provide it more leverage in negotiating with content providers because of DirecTV’s strong subscriber base.   Following the merger, AT&T will gain over 20 million DirecTV subscribers in the U.S., in addition to its existing 5.7 million U-verse subscribers. AT&T will also gain content rights such as the NFL Sunday Ticket, which is one of the hallmarks of DirecTV’s offerings. In fact, Sunday Ticket is such an important part of the deal that if its contract is not renewed on expected terms when it expires in 2015, AT&T can potentially pull out of this agreement with DirecTV. 
The deal is also expected to help AT&T enter into lucrative markets in Latin America, where DirecTV is the leading pay-TV provider with over 18 million subscribers (including Sky Mexico customers). There is still ample room for growth in the region because of its burgeoning middle class and low pay-TV penetration (40%). Therefore, it is not surprising that Latin America is DirecTV’s fastest growing business division in the wake of saturating U.S. markets – Latin America contributes about 18% of the company’s value according to our estimates.
Terms Of Transaction
As part of the agreement, AT&T will pay DirecTV shareholders $95 per share, including $28.50 in cash and $66.50 in stock. This purchase price implies a total deal value of $67.1 billion, including DirecTV’s net debt of $18.6 billion. AT&T announced that it intends to use its cash on hand and existing financing facilities to finance the cash portion of the deal, though it may also sell some non-core assets. The telco currently has about $3.6 billion in cash and cash equivalents for immediate use.
Conflict Of Interest
AT&T will sell its 8.4% stake in America Movil SAB (NASDAQ:AMOV), presently worth about $5.8 billion, in the open market to facilitate the regulatory approval process of its deal with DirecTV. America Movil is a leading wireless network provider in Latin America, and TV services are one of its fastest growing businesses. With respective market shares of about 22% and 18% in the pay-TV subscriber market in Latin America, America Movil is a major competitor for DirecTV in the pay-TV market in the region. As this deal will put AT&T directly in competition with America Movil, there would be a potential conflict of interest, so AT&T is divesting its stake in America Movil. 
Considering the difficult regulatory process and past unsuccessful deals in the industry, AT&T is leaving no stone unturned to ensure the deal is approved. In its press release confirming the deal, the company announced that its appointees to the America Movil Board of Directors would immediately resign “to avoid even the appearance of any conflict.” Notes:
- Press Release, DirecTV, May 18 2014 [↩]
- Ref:1 [↩] [↩] [↩]
- AT&T to Buy DirecTV for $48.5 Billion in Move to Expand Clout, NYTimes, May 18, 2014 [↩]
- DirecTV, Dish lead in customer satisfaction, FierceCable, Dec 3 2013 [↩]
- DirecTV, AT&T Place First; Comcast, TWC At Bottom, MultiChannel.com, May 20 2014 [↩]
- How AT&T’s Deal for DirecTV Could Affect the Industry, NYTimes, May 19 2014 [↩]
- America Movil takes over Latin American TV market lead from DirecTV, Fierce Telecom, November 2012 [↩]