AT&T to spend $49 billion for DirecTV

AT&T solidified its purchase of DirecTV on Sunday, agreeing to pay $49 billion for the company, and giving it a lot of leverage with media companies.

The Wall Street Journal story by Thomas Gryta and Shalini Ramachandran pointed out the deal follows the $45 billion Comcast/Time Warner deal:

AT&T Inc. agreed to acquire DirecTV for $49 billion, a deal that would make it a major player in pay television and increase its clout with media companies at a time when video consumption is moving online.

The agreement, which the companies’ boards approved on Sunday, comes just three months after Comcast Corp.’s $45 billion agreement to buy Time Warner Cable Inc.

The deals show how the biggest companies in television and telecommunications are bulking up to face a changing media landscape. Growth is slowing in some markets, like pay TV and wireless subscriptions, and is exploding in others, like streaming video. The companies are betting that bigger scale will give them the resources to invest in new capabilities and the leverage to hammer out commercial arrangements in the media world.

The New York Times story by Michael J. de la Merced and David Gelles said the move would better position AT&T to compete with Comcast:

By acquiring the country’s biggest satellite television operator, AT&T will help bolster its competitive position against Comcast. Though pay television is considered a mature market whose subscriber growth has slowed sharply in recent years, the business nonetheless generates billions of dollars in cash.

Through the acquisition, AT&T will transform itself from a relatively small player in the sector to the second-biggest provider, coming in second only to Comcast. AT&T has about 5.7 million TV customers through its U-verse service, while the satellite TV operator has about 20.3 million customers in the United States.

Under the agreement’s terms, AT&T will pay $95 a share in stock and cash, roughly 10 percent above DirecTV’s closing stock price on Friday and about 30 percent higher than where its shares were trading before word of a potential transaction began to emerge.

Including the assumption of DirecTV’s debt, the deal is valued at about $67.1 billion. Existing DirecTV shareholders would own 15 percent to 16 percent of the combined company after closing, which is expected in a year’s time.

The deal is the biggest in years for AT&T, which has long looked to acquisitions for growth. It is the largest transaction that the company has announced since its aborted $39 billion offer for T-Mobile three years ago, a takeover fiercely opposed by antitrust regulators because it would have cut the number of wireless phone service providers.

Alex Sherman and Scott Moritz wrote for Bloomberg that DirecTV needed to put together a deal in order to survive:

DirecTV, which doesn’t have its own phone service or a competitive Internet offering, was under pressure to find a partner as more viewers go online for video and the pool of traditional pay-TV customers shrinks in the U.S.

With the transaction, AT&T said its mobile network and high-speed broadband network will cover 70 million customer locations. That was one of the reasons for the deal because it helps customers watch TV on any device, DirecTV CEO Mike White said in a phone interview.

“Randall and I have had a relationship for a number of years,” White said. “Over the last year, things began to change with technologies — AT&T started to be able to offer more broadband and better broadband. With it comes a continuing evolution for mobile video.”

In the joint phone interview, Stephenson highlighted DirecTV’s relationships with content providers and head start in setting up a package of Internet-delivered channels similar to a pay-TV bundle, known as over-the-top service.

DirecTV will still be based in El Segundo, California, and its service will be available on a standalone basis for at least three years after the acquisition closes.

Roger Yu wrote for USA Today how the deal will help AT&T offer more services to clients in various markets:

The deal boosts AT&T’s customer total, but its desire to grow revenue per customer — a key industry metric — also may have pushed the company’s management to move quickly.

By folding satellite-TV service into its broad telecom portfolio — wireless, phone and fiber-optic broadband and TV — AT&T will be in an ideal position to create varied bundled packages to sell more options at its 2,300 retail stores and thousands of dealers and agents. It can sell wireless contracts with land-line broadband Internet, and package them with TV programming and other ancillary services, such as home security.

For customers in its non-U-Verse markets, it can offer its existing services along with satellite TV. Eventually, the company may also introduce Internet packages delivered on its fastest wireless networks if it can work out lower pricing levels and address issues surrounding monthly cap limits.

Currently, AT&T customers who have U-verse triple-play service, which includes land-line phone, broadband Internet and cable TV, spend about $170 each month (not including wireless service). With its satellite TV revenue alone, DirecTV generated $102.18 per user in 2013, up 5.4% from 2012.

On the content front, a combined company would also have more bargaining leverage in talks with content providers for retransmission and licensing fees. “You hope you can squeeze out some, if not lower rates, some slower-growing rates,” says SNL Kagan analyst Ian Olgeirson.

The case for the merger is compelling, but it seems that the price is quite high. There are also integration and technology issues that could cause the combined company headaches as well. It will also be interesting to see how customers respond to the bigger company – and if it can retain clients from all the companies.