AT&T Inc. Market Cap. (23/05/2014): $183.4bn
DirecTV Market Cap. (23/05/2014): $42.3bn
The US telecommunication conglomerate, AT&T, has reached an agreement to acquire one of world leading providers of digital television entertainment services, DirecTV, for a price of $48.5bn. AT&T is the US’s second largest provider of mobile telephone, leading provider of landline services and broadband Internet. According to a recent shareholders announcement, the acquisition represents yet another step in achieving AT&T’s goal of becoming the market leader across the sectors in which it currently operates.
The main motivation behind the acquisition is to offer a more comprehensive bundle of services to customers, making AT&T a strong “quad-play” provider, with offerings in Telephone, Wireless, Broadband, and Pay TV. Moreover, a larger market share will strengthen AT&T’s bargaining power against content providers, which echoes the motivation behind the expected merger of the two telecommunications and media conglomerates, Comcast and Time Warner Cable, that was announced mere months ago.
Industry analyst project that these two multi-billion dollar mergers could pave the path for an oncoming wave of mergers and acquisitions in the telecom and media industry, as the industry continues to consolidate. Due to intense competition within the industry, and growing power of content providers, M&A activity is picking up in the industry to improve economies of scale, increase market share, and increase bargaining power with content providers.
In an effort to maintain its leading position in the telecom industry, AT&T, through the acquisition would be able to extend its buddle of services to a larger audience comprising of AT&T’s existing 5.7m subscribers across 20 states and DirecTV’s national coverage of 20.3m customers. Likewise, DirecTV can leverage AT&T’s customer base and distribution channels to increase its subscribers. Consequently, this deal would add national TV coverage to AT&T’s portfolio, mirroring its comprehensive mobile network coverage.
DirecTV is one the largest American direct-broadcast satellite service providers and broadcasters, covering approximately 38m subscribers across the US, Latin America and the Carribbean. DirecTV controls some of the most coveted TV content on the US market, namely the rights to broadcast the National Football League’s popular Sunday afternoon games. Therefore, AT&T’s acquisition of DirecTV would not only build a larger customers base, but also would give rise to a company that, given its size, would be in a better position to negotiate deals with content providers, a strategy that echoes one of the main reasons for the recent merger between America’s two biggest cable-TV companies, Comcast and Time Warner Cable.
In addition, DirecTV’s holdings in the Latin American market could prove to be a fantastic growth opportunity for AT&T. DirecTV has a 93% stake in Sky Brazil, which is the leading TV provider in the largest Latin America market. Moreover, DirecTV has a wholly-owned subsidiary, PanAmericana, which offers the DirecTV brand in Argentina, Chile, Colombia, Puerto Rico, and Venezuela. DirecTV has a minority stake of 41 percent in Sky Mexico, which is present in Mexico, the Dominican Republic, and throughout Central America. Combined, these subsidiaries strengthen AT&T’s prospects in the Latin American markets.
One of the main threats to the deal stems from regulatory concerns. The deal will be the second largest in the telecommunications industry in the past year, ranking after Verizon’s $130bn deal to acquire the rest of its U.S. wireless business, and ahead of the $45.2bn Comcast / Time Warner Cable merger.
Looking to AT&T recent history in M&A attempts, the company has had to back down from acquiring T-Mobile in 2011 due to anti-trust regulatory objections. In an effort to alleviate potential fears, this time AT&T has made a number of concessions to government officials, such as expanding high-speed broadband access, especially in rural areas, and more importantly agreeing to sell its 8% stake in Mexico’s America Movil, a direct competitor to DirecTV’s subsidiaries in Brazil and Colombia. Company officials have estimated that selling the stake in Carlos Slim’s media empire would amount to reducing AT&T’s earnings by about 5 cents a share.
The recently announced deal comes in at $48.5bn with AT&T paying $95 for each share of DirecTV, split between $28.50 in cash and the equivalent of $66.50 in stock, which marks a 10% premium to DirecTV’s closing price at the end of last week. AT&T plans to finance the cash portion of the deal with cash on hand, the sale of non-core assets, committed financing facilities and debt market transactions. At a $67.1 billion deal value, which includes DirecTV’s net debt, AT&T is paying 8.15x DirecTV’s trailing EBITDA, which compares to the 8.6x EBITDA valuation multiple paid by Comcast for Time Warner Cable and is in line with Bloomberg’s 5-year average for cable and satellite companies that stands at 8.11x TTM EBITDA.
Overall, AT&T’s CEO stated that the acquisition of DirecTV would lead to a total of $1.6bn in cost savings in the following 3 years. Given the potential regulatory risks associated with the deal, the companies negotiated special agreements in case the deal won’t receive regulatory approval. At the end of negotiations AT&T won’t owe a breakup fee to DirecTV if the deal is blocked by regulators on anti-trust grounds, a much better deal than the price paid for the failed effort to acquire T-Mobile when AT&T paid $3bn in cash plus wireless frequencies and a roaming agreement. DirecTV will pay AT&T a breakup fee of $1.4bn if it instead agrees to be sold to another company. Both companies may call off the combination if it’s not completed by May 18, 2015.
AT&T retained the advice of Lazard in order to support its internal M&A team, while Goldman Sachs and Bank of America Merrill Lynch advised DirecTV.