AT&T-DirecTV Deal Likely To Get Regulatory Approval Soon

A recent report in the Wall Street Journal indicated that the Justice Department and the Federal Communications Commission (FCC) have almost finished reviewing AT&T‘s (NYSE:T) proposed acquisition of satellite-TV provider DirecTV (NASDAQ:DTV) and are unlikely to block it. This is good news for AT&T considering that regulators had fiercely opposed Comcast‘s (NASDAQ:CMCSA) proposed merger with Time Warner Cable (NYSE:TWC), which eventually led to the deal getting scuttled. However, the AT&T-DirecTV merger doesn’t create the same problems of skewed market dominance or unfair competition as the Comcast deal. Additionally, some reports suggest that regulators’ preoccupation with the Comcast deal might also have helped AT&T in getting a potential go-ahead. ^[1]

For its part, AT&T sold its 8.3% stake in Latin American carrier America Movil last year to avoid any potential conflict of interest and help it gain regulatory approval for its acquisition of DirecTV. America Movil is a major competitor of DirecTV in the pay-TV market in Latin America, and the AT&T-DirecTV deal put AT&T in competition with the Carlos Slim-controlled telecom major, creating a potential conflict of interest. ^[2]

If regulators approve the deal, it will enable AT&T 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.

We have a $37 price estimate for AT&T, which is slightly ahead of the current market price.

See our complete analysis for AT&T here

Strategic Benefits To AT&T With DirecTV Deal

The deal will provide AT&T an opportunity to rapidly expand its 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 three offered by Comcast (fixed-line, broadband and TV) or Verizon (NYSE:VZ) (wireless, fixed-line, broadband) could also provide it a significant competitive advantage. ^[3]

AT&T’s acquisition of DirecTV could also provide it more leverage in negotiating with content providers because of DirecTV’s strong subscriber base. ^{[4] [5]} Following the merger, AT&T will gain over 20 million DirecTV subscribers in the U.S., in addition to its existing 6 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 was such an important part of the deal that AT&T put an opt-out clause in the initial agreement which would have enabled it to pull out of the deal if DirecTV’s contract with NFL was not renewed. However, that wasn’t an issue, as the pay TV provider extended its exclusive rights to carry the NFL Sunday Ticket for 8 more years in an estimated $1.5 billion a year deal in October last year. ^{[6] [7]}

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.

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1. U.S. Authorities Near End of AT&T-DirecTV Review, Unlikely to Block Deal, May 12 2015, WSJ [↩]
2. Press Release, America Movil, June 24 2014 [↩]
3. AT&T to Buy DirecTV for $48.5 Billion in Move to Expand Clout, NYTimes, May 18, 2014 [↩]
4. DirecTV, Dish lead in customer satisfaction, FierceCable, Dec 3 2013 [↩]
5. DirecTV, AT&T Place First; Comcast, TWC At Bottom, MultiChannel.com, May 20 2014 [↩]
6. How AT&T’s Deal for DirecTV Could Affect the Industry, NYTimes, May 19 2014 [↩]
7. DirecTV scores NFL Sunday Ticket exclusivity for 8 more years, Oct 2 2014, Digital Trends [↩]