The proposed union of the telco giant and the nation's largest satellite TV provider continues the torrid pace of consolidation among MVPDs. Traditional players are looking to diversify operations and bulk up against the subscriber erosion fueled by alternatives offered by Netflix and other upstart digital services.
Deal will allow AT&T to vastly expand its footprint in the video biz, while AT&T's pipeline into the home will help DirecTV overcome its disadvantage of not being able to provide high-speed Internet access to its subscribers. DirecTV at present has 20.2 million subscribers in the U.S. and another 18 million in Latin America. AT&T has about 5.7 million subscribers to its U-Verse pay TV platform, which has faced geographical limitations in its ability to offer service.
Sunday's announcement comes three months after the nation's largest cable operator, Comcast Corp., set a $45.2 billion pact to swallow up its closest cable rival, Time Warner Cable. That deal will create a cable colossus serving about 30 million subscribers, once divestitures have been completed. AT&T said it would be able to offer broadband service to about 70 million potential customers once it absorbs DirecTV.
Comcast-TW Cable is in the midst of an extensive review by several federal agencies that has drawn fierce fire from opponents and made the subject of media consolidation a thorny issue for both parties in Congress. The megabucks AT&T-DirecTV deal will only add fuel to the fire for detractors and will probably heighten scrutiny of both transactions.
AT&T and DirecTV have flirted with talks more than once in the past, but the discussions this time around took on urgency after Comcast Corp. surprised the biz on Feb. 12 with its deal to scoop up Time Warner Cable.
AT&T's announcement of the deal included several olive branches to the regulators that will need to bless the transaction. AT&T vowed to adhere to the net neutrality rules established by the FCC in 2010, even as the commission is in the midst of overhauling the rules that govern how consumers and businesses access the Internet. The current commission has angered open-Internet advocates by suggesting that some form of premium access fees may be appropriate for commercial entities, such as Netflix, that suck up so much bandwidth. AT&T said it would adhere to the 2010 protocols no matter what happens with the FCC's review.
AT&T vowed to invest in new infrastructure to expand the availability of broadband service to 15 million households, mostly in rural areas where it does not currently offer service. It also pledged to take the consumer-friendly step of offering a broadband-only service package for consumers who only want to access over the top services like Netlfix and Hulu, at a price guaranteed for three years after the closing of the deal.
AT&T chairman Randall Stephenson called the merger "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."
Stephenson emphasized that the acquisition was attractive to AT&T because of DirecTV's reach, its content relationships and fast-growing Latin American footprint. AT&T brings to the table 2,300 retail stores and other sales channels that can offer a cable-like bundle of video, telephone and broadband service -- something neither AT&T or DirecTV could do as effectively on their own.
"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," Stephenson said.
DirecTV CEO Mike White said the deal made sense for shareholders because it will make the pioneering sat-TV provider more competitive in more markets. DirecTV was founded by Hughes Electronics in 1990 and began beaming TV channel packages to subscribers on pizza-sized satellite dishes in 1994.
"This compelling and complementary combination will bring significant benefits to all consumers, shareholders and DirecTV employees," said White. "U.S. consumers will have access to a more competitive bundle; shareholders will benefit from the enhanced value of the combined company; and employees will have the advantage of being part of a stronger, more competitive company, well positioned to meet the evolving video and broadband needs of the 21st century marketplace."
Deal calls for AT&T to acquire DirecTV for a combination of cash and stock that works out to $95 a share, or $28.50 in cash and $65.50 in AT&T stock. That's a premium over DirecTV's recent trading levels and 7.7 multiple of the satcaster's projected 2014 earnings before interest, taxes, depreciation and amortization.
DirecTV shares closed at $86.18 on Friday, after rising 11% since April 30 when the talks with AT&T were first reported. AT&T stock closed at $36.74 on Friday, up 22 cents. The telco's shares climbed 2.3% since rumors of the deal surfaced.
AT&T said it anticipated $1.6 billion in operational savings from the merger within three years of the deal's closing. DirecTV, which has about 16,000 employees, would remain headquartered in El Segundo, Calif.
Analysts have speculated that AT&T could migrate its U-verse subscribers to DirecTV's satellite-delivered service, freeing up bandwidth in its terrestrial data networks that would allow it to expand broadband service. With 26 million pay-TV subscribers between DirecTV and U-verse, AT&T would also gain leverage in programming negotiations on par with a merged Comcast-TW Cable.
However, AT&T's bid for DirecTV could face even higher regulatory hurdles than Comcast-TW Cable as it would effectively eliminate a pay-TV option in about 25% of the U.S. where the phone company sells U-verse in competition with DirecTV. AT&T in 2011 was forced to scrap efforts to buy wireless firm T-Mobile for $39 billion, after the Department of Justice sued to stop it on antitrust grounds.
For AT&T, the deal comes 16 years after its last effort to break into the traditional pay TV business. In 1998, AT&T paid $48 billion to acquire John Malone's Tele-Communications Inc., then the biggest U.S. cable operator with 14 million subscribers. In 2000, AT&T acquired MediaOne for $44 billion -- outbidding Comcast.
But only three years after buying TCI, AT&T exited stage left. In 2001, it agreed to sell AT&T Broadband to Comcast for $47 billion plus the assumption of $25 billion in debt.
AT&T and DirecTV have been business partners for several years. In 2009, the telco began exclusively selling a co-branded version of DirecTV's satellite TV service -- which it markets in non-U-verse areas -- and dropped its previous agreement with Dish.
AT&T noted that the expansion of its video service would also allow it to develop "more unique content offerings for consumers" through the joint investment venture it recently struck with Chernin Group. DirecTV brings to AT&T its sports channels, including the lucrative "NFL Sunday Ticket" franchise. DirecTV also has used its distribution clout over the years to acquire minority stakes in cablers GSN, MLB Network, NHL Network and SundanceTV.
Related storiesAT&T Close to Announcing $50 Billion Deal to Acquire DirecTVDirecTV Has Acquired VOD 'Stacking Rights' from Turner, CEO Mike White SaysAT&T in Advanced Talks to Buy DirecTV for About $50 Billion: Reports 2014 Variety Media, LLC, a subsidiary of Penske Business Media; Distributed by Tribune Content Agency, LLCCopyright © 2015, The Baltimore Sun