AT&T-DirecTV Deal: FCC Likely To Grant Approval With Caveats

The Federal Communications Commission (FCC) is likely to approve AT&T‘s (NYSE:T) acquisition of satellite-TV provider DirecTV (NASDAQ:DTV) in the next few weeks, but the telecom provider may need to accept a number of conditions before getting the FCC’s seal of approval. The biggest concern is with respect to the FCC’s new net neutrality rules, which AT&T had earlier publicly opposed along with other service providers. In fact, AT&T was the first major Internet service provider to file a lawsuit against the FCC related to the issue in April. However, the company is apparently willing to abide by these rules as a condition to the deal. ((AT&T is prepared to abide by the new net neutrality rules under the DirecTV deal, WSJ, June 2 2015))

The new net neutrality rules will require AT&T to comply with a ban against “paid prioritization”, thereby disallowing different treatment for different websites and content. It would also have to abide by the FCC’s ban on blocking websites. It is pertinent to note that AT&T had blocked FaceTime on Apple devices and Google Hangout on Android devices in 2012 and only allowed limited access until the end of 2013.

Considering that AT&T has thus far left no stone unturned in removing roadblocks to approval of the deal, it is not surprising that it has agreed to abide by the FCC’s new net neutrality rules. However, we will have to wait and watch how the carrier deals with other anticipated issues such as possible curbs on “zero-rating” practices (providing free access to some websites) and its pricing of new standalone broadband products. Streaming giant Netflix and network delivery provider Cogent Communications recently raised concerns over the AT&T-DirecTV deal, asking for certain conditions to be imposed on AT&T to keep a check on its broadband pricing strategies. The good news is that they did not necessarily oppose the deal like they did for Comcast and Time Warner Cable, which is reason for AT&T and DirecTV to be optimistic about the FCC’s approval.

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

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.

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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