AT&T to Buy DirecTV for $48.5 Billion — Analysts Trying to Figure Out Why AT&T Made This Deal

May 19, 2014  •  Post A Comment

"AT&T agreed on Sunday, May 18, 2014, to buy the satellite television operator DirecTV for $48.5 billion," reports The New York Times.

The Times adds, "Through the deal, AT&T would become the country’s second-biggest pay TV provider, behind only 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."

For the past several weeks analysts have been trying to figure out what AT&T gets out of the deal.

For example, on May 13, according to Tiernan Ray of Barron's, "Craig Moffett of the eponymous Moffett/Nathanson research house issued a scathing screed about the deal, writing: 'Like skid row junkies in the final wretched tremens of downward spiral, telecom/cable/satellite investors now appear to need a deal fix almost daily to stave off the messy crisis of incontinence that comes with the inevitable withdrawal.'"

Ray adds that Moffett writes: " 'What DirecTV doesn’t solve is AT&T’s growth problem,' saying, 'What will AT&T do when first subscriber growth, and then EBITDA growth, and finally revenue growth, all turn negative, as seems inevitable in short order? It is not hard to put a fair valuation on a business that is shrinking — there’s an appropriate valuation for everything — but as a practical matter, when DirecTV begins to shrink, then the price paid will no longer matter … it will merely be another liability that AT&T will need to offset by growth somewhere else. By that time, AT&T’s revenues will be in the $160B range. A 1% contraction in pro-forma consolidated revenue by that time would require finding a business that is adding $1.6B in new revenues every year just to get back to zero. Good luck.'"

And back on May 1, according to re/code.net, Moffett wrote that "AT&T might eventually end up saving $400 million a year in programming costs. Lots of people would be very pleased to say that they saved $400 million a year, but in this case, Moffett notes, it’s just 'a pretax return of 1% on a $40B price tag. Not nothing, but not close to sufficient.'"

According to the Barron's piece, "R. W. Baird’s William Power, who follows AT&T and rates its shares Neutral, writes, 'The financial merits appear solid, with the strategic fit mixed, dependent ultimately on execution.'"

Barron's adds, "Canaccord Genuity’s Greg Miller, who has a Hold rating on AT&T stock, notes that AT&T’s deals have in past met their objectives, but that he sees little strategic rationale even if the financials make sense:

'Difficult to make strategic sense of AT&T-DTV — With pay TV video subscriber growth in decline due to competition and technological substitution (over-the-top video), the long-term potential contribution of either DirecTV or Dish Network is questionable. Pay TV business models could easily be on the cusp of trends similar to those in the US wireline business a decade ago. Financial merits are potentially attractive — With AT&T’s current 5% dividend yield and DirecTV trading at an implied 6.0% Free Cash Flow yield (at $100 per share) before synergies, which currently cannot be estimated without further details, a deal could make financial sense.'"

According to the New York Times article, Randall L. Stephenson, AT&T’s chief executive, said in an interview Sunday, “If you think about what we’re trying to accomplish, we’re trying to get way down the road to get content across multiple devices. The more we peeled the onion back, frankly the better we felt about this.”

The Times also notes, "Under the agreement’s terms, AT&T would pay $95 a share in stock and cash — roughly 10 percent higher than DirecTV’s closing stock price on Friday, May 16, 2014, 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 worth about $67.1 billion. Existing DirecTV shareholders would own 15 to 16 percent of the combined company after closing, which is expected in a year’s time."


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