AT&T and DirecTV have reached agreement on a merger. AT&T is offering USD 67.1 billion in cash and shares as well as taking over USD 18.6 billion in debt from DirecTV. This values DirecTV at 7.7x expected annual EBITDA this year. The companies expect to close the deal within 12 months. The cash part of the transaction will be financed in part from the sale of AT&T's stake in Americal Movil. According to Reuters, there was no break-up fee agreed if the takeover is rejected by regulators. However, AT&T must pay USD 1.445 billion if DirecTV's shareholders reject the acquisition.
DirecTV's most important assets include subscribers for satellite TV (20 million in the US and 18 million in Latin America, cash flow and first-class content, mainly in sport. AT&T expects cost synergies of USD 1.6 billion per year by the third year of the acquisition, thanks to increased scale on the TV/video market. AT&T said the acquisition is also supported by DirecTV's strong brand name, the diversification of its portfolio, accelerated broadband growth and expansion outside the US. In addition, AT&T made a number of promises intended to win regulatory support for the deal.
The growth in broadband will come in part from selling DSL/FTTH to DirecTV customers. AT&T said it will expand its broadband reach by 15 million households in the next five years to a total 70 million. It will expand mainly in outlying areas, both with FTTH and fixed/wireless (LTE).
AT&T plans to offer broadband on a standalone basis, targeting customers who use video services over-the-top (AT&T mentions Netflix and Hulu). Download speeds will be a minimum 6 Mbps ('where feasible') and the price will be guaranteed for three years. DirecTV will also still be available on a standalone basis. In addition, AT&T pledged to respect net neutrality.
The proposed acquisition comes as Comcast and Time Warner Cable have also agreed to merge. AT&T apparently does not want to be left a tiny player on the TV market. The next question is what is Verizon's strategy, as well as the future of Dish Network (the other major satellite TV provider) and the other cable operators. The other mobile operators Sprint and T-Mobile US could also have a stake in the market.
A bit of skepticism is justified when it comes to AT&T's promises. Expansion to outlying areas is good, but this will mainly be done through LTE, raising the question how robust and affordable the connections will be. As for net neutrality, definitions vary considerably, giving AT&T room to set its own terms.
This is primarily a case of horizontal integration, combining a fixed-line operator and satellite TV provider. This is an important point to make to the regulators, as very little changes on the broadband market. On the TV market, AT&T already has little power.
The content from DirecTV will be welcome, as will the expansion to Latin America and cash flow. This will give AT&T more room to invest in content and networks (not to mention raising dividends). The question is whether the content needs to be strengthened further with original content, similar to Netflix, in order to improve the negotiating position with producers. The cost synergies are limited, as this is an horizontal integration. These probably could be increased, as we have noted previously, though offloading live TV to satellite. The sales synergies also appear limited to upselling and were not specifically outlined by AT&T. A final argument for the deal though is keeping DirecTV out of the hands of a rival, such as Dish, Verizon or Sprint.
In short, this is a defensive move by AT&T. It doesn't want to fall behind Comcast, it needs to strengthen its position with content providers, and DirecTV should not go to a rival. If regulators approve the latest mergers, it's clear more consolidation is ahead for the US market.
