Related Articles
Screenshot by Roger Cheng/CNET
AT&T said on Sunday that it had agreed to buy DirecTV in a cash and stock deal worth $48.5 billion, marking the second proposed deal this year to shake up the pay-television business.
DirecTV shareholders will receive a total of $95 per share, with $28.50 to be paid in cash and $66.50 paid in stock, the companies said Sunday in a statement. The $95 per share offer is a 10 percent premium over DirecTV’s closing stock price Friday.
“The transaction combines complementary strengths to create a unique new competitor with unprecedented capabilities in mobility, video, and broadband services,” the companies said in the joint statement.
The acquisition, which the companies expect to close within 12 months, creates a powerhouse for services in the home, allowing AT&T to pair its own wireless network with DirecTV’s satellite TV service, which is available nationwide. The deal comes as AT&T faces a slowdown in growth in its core wireless business, as well intense competition for its wireline service, a factor in the proposed $45.2 billion merger between Comcast and Time Warner Cable.
That means more consumers potentially getting access to AT&T’s TV service, which is currently limited to the parts of the country that the company has a wireline infrastructure. It also raises the possibility of service bundles that include wireless voice and data services.
“For at least some consumers, that could be an interesting alternative to their current cable and telco providers outside of AT&T’s footprint, so that’s good,” said Jan Dawson, an analyst at Jackdaw Research.
It’s just the latest deal in what has been an acquisitive first few months of the year. AT&T-DirecTV follows the proposed Comcast-Time Warner Cable deal, Facebook’s $19 billion purchase of WhatsApp, Lenovo’s $2.9 billion acquisition of Motorola Mobility from Google, and the continued chatter of Sprint’s desire to merge with T-Mobile.
Let’s make a deal
AT&T hasn’t been secretive about its desire to expand through acquisition, with the confirmation of the deal coming after weeks of speculation over a potential deal. The telco giant had previously looked at a deal in Europe, and considered a takeover of the UK’s Vodafone. Prior to the speculation, however, some had looked at AT&T to strike a deal with DirecTV rival Dish Network, which was seen as the more attractively priced acquisition target.
Related earnings stories
- AT&T shows off its innovative side
- AT&T to take gigabit broadband to 21 new metro areas
- Is AT&T’s second-screen app really good for babies?
- AT&T calls on “lab stores” to help plot a retail revolution
- AT&T shrugs off T-Mobile as earnings top expectations
DirecTV is considered the more fundamentally sound of the two satellite companies. Still, DirecTV has had its own share of growth challenges, and only added 12,000 net new TV subscribers in the US in the first quarter, bringing its total to 20.3 million. DirecTV also added 361,000 net new customers from its Latin America business.
AT&T, in comparison, added 201,000 net new U-Verse TV subscribers in the first quarter, bringing its total to 5.7 million. It also added 634,000 net new U-Verse Internet customers, but only 78,000 total broadband customers when factoring the loss of its DSL subscribers.
When factoring in the debt, the total amount of the transaction exceeds $67 billion.
“With pay-TV video subscriber growth in decline due to competition and technology substitution, the long-term potential contribution of either DirecTV or Dish Network is questionable,” Canaccord Genuity analyst Greg Miller said in a research note published ahead of the announcement.
Miller isn’t the only one skeptical, with others questioning the merits and logic of such a merger.
Why AT&T wants DirecTV
So why strike a deal? AT&T will likely derive its merger cost savings (known in industry lingo as synergies) from the elimination of general corporate spending over at DirecTV, with many of the operations likely folded into the telco.
The merger cost savings will show up within 12 months after the close of the deal, and are estimated to exceed an $1.6 billion annual run rate by year three after disclosing, the company said.
In theory, the combined company would also be able to better negotiate for better rates for programming, with a combined TV subscriber base of nearly 26 million. DirecTV likely already pays lower rates because of its larger base.
But Barclays analyst Kannan Venkateshwar noted that whatever benefit AT&T would get from DirecTV’s lower rates would only apply to its U-Verse TV customers.
While AT&T has been investing in its U-Verse TV platform, the company could opt to switch entirely to the DirecTV service, which already reaches the entire nation without additional investment.
In the areas where AT&T has a landline network, it could bundle the service with U-Verse Internet, which has been relatively successful. But outside of its core territory, AT&T could offer Internet data through its wireless network, particularly in more rural areas where there isn’t a lot of network infrastructure, but where satellite TV service exists.
AT&T said it plans to sell all of the services through its 2,300 retails stores, as well as thousands of authorized dealers and agents of both companies nationwide.
“This is a unique opportunity that will redefine the video entertainment industry and create a company able to offer new bundles and deliver content to consumers across multiple screens – mobile devices, TVs, laptops, cars, and even airplane,” AT&T CEO Randall Stephenson said in a statement.
Placating regulators
On the regulatory side, AT&T shouldn’t have too many hurdles. The company will likely have an easier time than its last attempt at a blockbuster deal: its failed bid to purchase T-Mobile USA from Deutsche Telekom for $39 billion in 2011. The deal fell apart after the Justice Department said it would block the merger, which would have reduced the number of national wireless carriers.
Still, the size of the deal has some consumer advocates worry, especially in the wake of the planned merger between Comcast and Time Warner Cable.
Marguerite Reardon/CNET
“The rush is on for some of the biggest industry players to get even bigger, with consumers left on the losing end,” said Delara Derakhshani, policy counsel for Consumers Union, in a statement. “You can’t justify AT&T buying DirecTV by pointing at Comcast’s grab for Time Warner, because neither one is a good deal for consumers.”
To win approval, AT&T has already offered a few concessions. The company said it would use the merger cost savings to expand its plans to build a broadband network to cover 15 million more people, mostly in rural areas where the government has been keen to provide Internet access. It will also commit to a standalone wireline broadband service of at least 6 megabits per second (where feasible) in areas where AT&T already offers its wireline services.
The combined company will also offer standalone DirecTV service, an attempt to placate fears that AT&T will force consumers to buy a package of services.
On the hot-button issue of Net neutrality — the concept that Internet service providers and governments should treat all Internet traffic the same — AT&T has vowed to honor the Internet protections established in 2010, even as the Federal Communications Commission has opened up the review process for a new, potentially more lax set of standards.
As AT&T would also obtain the company’s significant Latin American assets, the telco has agreed to divest its interest in América Móvil, which is expected to cut earnings by 5 cents a share. As a result, the company’s adjusted earnings growth for the year is expected to come in at the low end of its mid-single digit forecast.
AT&T and DirecTV agreed that there would be no penalty if regulators decide to shut down the deal, a stark contrast the reverse break-up fee of $3 billion in cash and $3 billion in spectrum assets AT&T had to cough up to T-Mobile when that deal was scrapped, according to Reuters. DirecTV has agreed to pay $1.4 billion if it backs out of the deal.
AT&T and DirecTV plan to hold a conference call on Monday at 5:30 am PT. Check back in with CNET for all of the updated details.
