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20 Million Reasons Why AT&T Wants DirecTV

AT&T’s Acquisition Of DirecTV: A Bet On Long-Term Growth
By: Sam Quest
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A deal between AT&T Inc. (T) and DirecTV (DTV) could be just a couple of weeks away, according to sources close to the matter. The two companies have been warming up to each other since the news first broke and with the blessings of the Department of Justice, it just might go through.

AT&T & DirecTV

AT&T is currently the largest telecom provider in the US in terms of total subscribers for all of its services combined. Those services include wireless telephony services along with a portfolio of wireline products. AT&T currently offers broadband cable services through its U-Verse offering which has around six million subscribers.

DirecTV is a satellite TV provider based out of El Segundo, CA. The company has a presence across several states along with significant exposure to the Latin American market. DirecTV’s latest report puts total subscribers at around 20 million with Average Revenue per User (ARPU) of $102.18 at the end of 2013.

The Deal

The deal is being valued at close to $100 per share or roughly $50 billion. Given DirecTV’s latest closing price of $87.16, it is valued at a 15% premium to the market and amounts to around $2,500 per subscriber. Comparatively, a pending acquisition of Time Warner Cable Inc. (TWC) by Comcast Corp. (CMCSA) at $45 billion puts the average subscriber acquisition cost at $3,947 for the latter.

There are a lot of questions over AT&T’s motivation to purchase DirecTV. The company represents a secondary offering for AT&T’s wireline business and does not own any wireless spectrum. At the same time, AT&T’s U-Verse has been growing in terms of subscribers and overall revenues. Subscribers grew by over 20% year-over-year (YoY) to 5.4 million causing revenues to increase 30.5% YoY to $12 billion at the end of 2013.

AT&T’s Motives

On the surface it does not make sense for AT&T to acquire DirecTV after spending billions in developing its U-Verse infrastructure. However, U-Verse is currently only offered in 21 states whereas the company already partners with DirecTV in other markets where it does not have either the infrastructure or licensing to operate.

AT&T’s U-Verse is based on a mixed infrastructure of fiber and copper. Connections to the curb are over a fiber network while curb-to-home connections are based on the old copper infrastructure and amount to 80% of required capital expenditure for a complete fiber-to-the-home (FTTH) network. This is one reason Verizon Communications Inc. (VZ) has halted expansion of its fiber-based FiOS network. That service is currently only being offered in 16 states. Verizon has stopped investments in new markets and has instead chosen to focus on markets it is already offering the service in.

Industry experts cite high costs of installing fiber infrastructure as a plausible reason for AT&T to gain subscribers through acquisition before development of the G.fast (fast access to subscriber terminals) technology. G.fast is expected to lower costs of deployment but the fiber connection made available through the technology will not be directly connected to a user's home.

If AT&T is thinking so far down the road and considering the competition posed by Verizon once G.fast technology is developed and deployed, it would make sense for the company to switch users to its U-Verse service as the company goes around developing its fiber network in markets it is currently not operating in.

Another reason for AT&T’s acquisition attempt could be DirecTV’s South American business. DirecTV is one of the leading providers of TV service in the region with a little over 20% of its $31 billion in 2013 revenues coming from Latin America. AT&T has shown interest in trying to diversify its geographic presence as the US market becomes increasingly saturated and competitive. With the acquisition of assets in the region, AT&T opens the door for expansion of services that the company currently offers through partnerships in the region.

Conclusion

AT&T’s motives behind the acquisition of DirecTV are open to question. However, on the surface it seems like the bid is a long-term play on growth in the company’s wireline offerings as well as diversification outside the US. All this could, however, amount to nothing if the Department of Justice prevents the two companies from joining forces.

M&A chatter has picked up a lot in the telecom and cable industries with the pending case of Comcast and Time Warner. Sprint Corp. (S) is also pushing ahead with its expected bid for T-Mobile US Inc. (TMUS) and AT&T’s bid for DirecTV could create further rattle that the Justice Department would rather avoid.

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