Thwarted in its pursuit of T-Mobile and with the potential Comcast/Time Warner Cable merger in mind, AT&T (NYSE:T) has reached an agreement with DIRECTV (NASDAQ:DTV) to buy the satellite television provider in a stock-and-cash transaction worth $48.5 billion -- $67.1 billion if DIRECTV’s net debt is included. While the boards of both companies have unanimously approved the deal, regulatory authorities are likely to prove less enthusiastic.
DIRECTV shareholders will receive $95.00 per share under the terms of the merger, comprised of $28.50 per share in cash and $66.50 per share in AT&T stock. AT&T intends to finance the cash portion of the transaction through a combination of cash on hand, sale of non-core assets, committed financing facilities, and opportunistic debt market transactions.
The deal would provide AT&T with significant video content (particularly sports programming) as well as a way to provide advanced triple-play services to rural areas where it considers upgrading the current wired infrastructure to be too expensive. It also expands the company’s addressable market in Latin America, where DIRECTV has 18 million subscribers and potential for significantly more, AT&T believes. The combined company will reach 70 million customer locations, AT&T asserts.
“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 airplanes. At the same time, it creates immediate and long-term value for our shareholders,” said Randall Stephenson, AT&T chairman and CEO via a press statement. “DIRECTV is the best option for us because they have the premier brand in pay TV, the best content relationships, and a fast-growing Latin American business. DIRECTV is a great fit with AT&T and together we’ll be able to enhance innovation and provide customers new competitive choices for what they want in mobile, video, and broadband services. We look forward to welcoming DIRECTV’s talented people to the AT&T family.”
AT&T expects the deal to be accretive on a free cash flow per share and adjusted EPS basis within the first 12 months after closing. The company also expects cost synergies to exceed $1.6 billion on an annual run rate basis after three years, driven primarily by increased scale in video.
The deal is subject to what will likely be a fairly bumpy regulatory review process, both in the United States and in Latin America. The proposed merger has already attracted criticism based on anti-competitive concerns, particularly with the proposed Comcast/Time Warner Cable merger as a backdrop. DIRECTV’s content ownership of ROOT SPORTS Networks and minority stakes in the Game Show Network, MLB Network, NHL Network, and the Sundance Channel also may draw scrutiny.
The deal may also increase worries that AT&T might not upgrade rural fixed-line networks, since it potentially could more easily and profitably offer video services via DIRECTV's satellite network. As part of the announcement, AT&T said it was committed to either building or enhancing high-speed broadband service to 15 million customer locations, mostly in rural areas where it currently does not provide high-speed broadband services, using what it described as “a combination of technologies including fiber to the premises and fixed wireless local loop capabilities.”
The company has already laid out a strategy to buttress the case for approval. To address potential concerns in Latin America, AT&T has pledged to divest its stake in América Móvil. Closer to home, the company was quick to say it would commit to the FCC's Open Internet protections established in 2010 for three years after closing.
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