AT&T Closes DIRECTV Buy Deal at $48.5B - Analyst Blog

AT&T, Inc. T has finally reached a definitive agreement to buy DIRECTV DTV for $48.5 billion. The proposed deal has been approved by the Boards of Directors of both companies. According to the press release, the deal is expected to be a combination of cash and stock bid of $95.00 per share based on AT&T's Friday i.e., May 16, closing price.

Besides offering financial synergies, we believe the prospective buyout will likely elevate AT&T's position in the pay-TV business, which is currently catered to by its U-Verse brand. Further, it will enable AT&T to provide bundled services that would include video services together with mobile and broadband offerings.

Going forward, the proposed acquisition should provide ample exposure to AT&T in the Latin American markets where DIRECTV is a leader in the pay-TV business. According to reports, the pay-TV market in Latin America remains underserved with only 40% of the population subscribing to such services.

Naturally, AT&T has ample room to further expand into an already established market while bringing in additional advanced technologies in content delivery. The company can now integrate its U-verse network with DIRECTV's satellite platform, which already enjoys a broad reach and offers efficient utilisation of broadband speed for delivering video services. 

The deal which is expected to close within the next twelve months now awaits the approvals of regulators and DIRECTV shareholders. To expedite regulatory approvals in Latin America and avoid regulatory conflicts, AT&T plans to divest its 8% stake holding in Mexican telecom giant, America Movil. 

Post-completion, AT&T expects this deal to be financially accretive within the first 12 months, and provide a boost to its cash flows and adjusted earnings per share. In addition, the deal would also offer significant cost synergies exceeding $1.6 billion on an annualised basis by the third year of closing. Going forward, the deal is likely to bolster AT&T's video revenues, enhance its broadband services and provide numerous other revenue opportunities through business expansion outside the U.S.

According to reports, the planned acquisition of DIRECTV will promote AT&T in the domestic pay-TV business to the second-largest position following Comcast Corporation CMCSA. It is worth noting that Comcast has also recently struck a $45 billion deal to buy Time Warner Cable Inc. TWC, representing the merging of two of the largest cable companies in the U.S.

The DIRECTV takeover will increase AT&T's video customer base by 20.3 million from its current base of 5.7 million customers. This will take the latter's pay-TV customer count to 26 million, close on the heels of Comcast-Time Warner Cable's combined pay-TV customer base of 30 million.

While the deal looks promising, however, there are a number of hurdles that AT&T is likely to face in the near future. The biggest challenge for the company is to receive approvals from The Federal Communications Commission (FCC) and the Department of Justice. The fact that the AT&T-DIRECTV merger will bring down the number of video operators from four to three, poses a significant threat that certainly would not go down well with regulators. As historically witnessed, regulators have always stressed on maintaining pricing competitiveness to benefit consumers. It might seem less likely that the FCC would forgo such issues easily this time around.

AT&T currently has a Zacks Rank #3 (Hold).