AT&T Closes DirecTV Acquisition: Reviewing The Concessions And Benefits
AT&T (NYSE:T) closed its $49 billion acquisition of satellite television provider DirecTV on Friday, after the Federal Communications Commission ratified the deal. While the company had to make some concessions in order to gain federal approval (relating to its broadband services and net neutrality), we think that they were worthwhile, considering the revenue and cost synergies that the combined company would provide in an increasingly competitive wireless and content distribution landscape. The deal will make AT&T the country’s largest pay TV provider, with more than 26 million total subscribers (20 million from DirecTV and about 6 million from AT&T’s native U-Verse service). To recap, DirecTV shareholders received 1.892 shares of AT&T common stock and $28.50 in cash per DirecTV share owned. Below is a brief run-down of what it took to get the deal done and how shareholders of the combined company are likely to benefit. [1]
Trefis has a $37 price estimate for AT&T is about 8% ahead of the current market price. We will be updating our valuation model shortly to reflect the business combination and our updated outlook.
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What Concessions Did AT&T Have To Make?
To get the deal done, AT&T has agreed to a few FCC-mandated conditions. The company will expand its high-speed gigabit fiber optic broadband access to 12.5 million customers. This translates to roughly 10 times the size of its present gigabit fiber deployment. The company will also have to offer discounted broadband to low-income households, while serving schools and libraries with better broadband access. More notably, the company has agreed to adhere to the FCC’s stricter net neutrality obligations that were passed this February. AT&T has agreed to prevent discrimination against its online video competition and it won’t provide favourable treatment for its own video offering under data caps. The firm has also agreed to share all its completed interconnection agreements with the FCC. This could be seen as a win for the FCC, since AT&T has been one of the strongest opponents to the agency’s controversial new rules. AT&T had earlier publicly opposed the move along with other service providers and the firm was the first major Internet service provider to file a lawsuit against the FCC in relation to the issue last April.
How The Deal Adds Shareholder Value?
1) Bundled Services To Bring Cost and Revenue Synergies: The merged company will be able to offer a “quadruple-play” bundle that includes four bundled services (mobile and fixed-line phone service, high-speed Internet and TV), compared to the three offered by Comcast (NASDAQ:CMCSA) (fixed-line, Internet and TV) and Verizon (NYSE:VZ) (wireless, fixed-line, broadband). Besides providing At&T with a competitive advantage in attracting new customers, the bundle could also induce DirecTV customers into switching on to AT&T for mobile services. Providing customers a greater number of services should effectively reduce overhead costs and bring down churn rates, limiting new customer acquisition costs for the carrier. The deal would also result in substantial savings, as the companies expect cost synergies of over $2.5 billion annually within three years of the deal closing, primarily on account of lower content costs (see below) and greater efficiencies in areas where operations of both companies overlap. [2]
2) Upping AT&T’s Content Game And Diversifying Its Distribution Footprint: The deal enables AT&T to become a leader of sorts in the content distribution space, across various platforms including mobile, broadband and TV. AT&T will also gain rights to content such as the NFL Sunday Ticket, which is one of the hallmarks of DirecTV’s offerings. The deal should also provide the company more leverage in negotiating with content providers, being the single largest pay TV provider in the United States. DirecTV’s core business has been increasingly facing headwinds as the U.S. pay TV Market saturates (top pay-TV providers lost about 125,000 customers in 2014), partly due to the rise of alternative platforms such as online streaming services and content consumption on mobile devices. ((MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 3, 2015, Leichtman Research Group)) However, the more diversified distribution footprint of the AT&T-DirectTV combo should help to alleviate some of these concerns, since it could adapt content for various platforms while potentially launching new over-the-top (OTT) video services that can be offered to AT&T’s broadband and mobile customers. The diversified distribution footprint could effectively hedge AT&T’s role as a content distributor.
3) Growth In Latin American Markets: 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, given its burgeoning middle class and low levels of pay-TV penetration (40%). Latin America has been DirecTV’s fastest growing business division in the wake of saturating U.S. markets.
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More Trefis Research
- AT&T Completes Acquisition of DIRECTV, AT&T Press Release [↩]
- Investor Briefing, April 22, 2015, AT&T Press Release [↩]