Why We Believe That The DirecTV-AT&T Merger Is Almost A Done deal

In a recent SEC filing, AT&T (NYSE:T) and DirecTV (NASDAQ:DTV) announced that they have elected to extend the “termination date” of their merger agreement for a short period of time. We take the extension of this date as a positive sign as it indicates that the companies are clearly hopeful of getting the required clearance within the next few weeks. Even though the merger has faced multiple roadblocks along the way, we believe that it is just a matter of time before it receives the FCC’s approval, primarily because the deal does not raise any red flags in relation to market share of the post-merger entity. Once approved, the merger will enable the DirecTV-AT&T combination to become a leader in content distribution across various platforms including mobile communications, high-speed Internet and TV.

Our price estimate for DirecTV stands at $95, implying a slight premium to the market.

See our complete analysis for DirecTV

A Long Road Traveled But The End Is Near

DirecTV and AT&T have extended the merger “termination date” twice in two months, first on May 15 and again with the filing. If the “termination date” passes pending regulatory review, the companies will have the option of calling off the whole thing. The companies have had to wait a long time for the FCC’s approval ever since the merger was announced in May last year. ^[1] The commission also had the Comcast (NASDAQ:CMCSA)-Time Warner Cable (NYSE:TWC) deal on its plate at the time and both merger proposals have had contrasting fortunes. While the Comcast-TWC deal faced stringent opposition from general consumers, industry players and consumer-advocacy groups alike, the DirecTV-AT&T merger escaped the public eye relatively unscathed. Regulators were also very vocal in their protest of the Comcast-TWC deal and with regulatory approval seeming a long-shot, Comcast decided to call off its merger plans altogether.

However, the DirecTV-AT&T combo has soldiered on. One of the major criticisms of the Comcast-TWC merger was that the business models of the companies were eerily similar and the main motivation behind the merger appeared to be the consolidation of market share. In contrast, DirecTV is primarily a satellite-TV provider and AT&T is telecommunications giant and their core competencies are not that similar to begin with. They do compete in the pay-TV market but DirecTV is a much bigger player and AT&T’s market share is only 6% of that market. ^[2] Their merger does not considerably affect choice for the customers and as a result, the FCC has looked at this merger more favorably. The other issue with the Comcast-TWC deal was the excessive market share of the post-merger entity. The DirecTV-AT&T deal does not raise any such red flags as the market shares for the combined entity in both pay-TV and internet markets will remain below the 30% unofficial limit. This leads us to believe that the deal will be able to pass the regulatory hurdles at the FCC as well as the Department of Justice.

The DirecTV-AT&T merger has taken so long to be approved as it has had to face many speed bumps along the way. The FCC had earlier stopped its review of the deal in March citing a pending court ruling on the issue of sharing sensitive information about pay-TV carriage contracts with third parties. An Appeals Court subsequently decided on the matter, freeing the FCC to restart its review. Additionally, it was recently reported that AT&T may need to accept a number of conditions before getting the FCC’s seal of approval, including accepting the FCC’s new net neutrality rules that the company had challenged earlier. ((AT&T is prepared to abide by the new net neutrality rules under the DirecTV deal, June 2 2015, Washington Post)) The companies have also had to quell plenty of accusations from other industry players that the merger might not be in public interest. Both companies have left no stone unturned in their pursuit of regulatory approval and now have the finish line in their sights. Analyzing how things have played out till now, we believe that it is just a matter of time before the DirecTV-AT&T deal receives the FCC’s nod of approval.

Why The Deal Is Important For DirecTV

DirecTV posted solid results over the past few years in terms of subscriber growth and average revenue per user (ARPU), consistently outperforming most competitors. However, the growing availability of online content as an alternative video platform, along with an expanding market for connected devices, has negatively impacted the entire pay-TV industry. This has led to a stagnation in subscriber growth, forcing pay-TV companies to look at other avenues to register revenue gains. Cable companies have effectively offset their video subscriber declines by selling high-speed Internet services, but satellite-TV providers such as DirecTV have not been able to follow suit because of speed constraints in satellite-based Internet services. Its deal with AT&T could provide DirecTV the channel through which to offer such services. (Related – Why Would DirecTV Merge With AT&T?)

The merged entity will likely offer a “quadruple-play” bundle of mobile and fixed-line phone service, high-speed Internet and pay-TV to bring diversity to DirecTV’s business. The bundle will also induce DirecTV customers into switching on to AT&T for mobile services, as the bundled packages will likely offer attractive pricing. The fact that the merged company will be able to offer four bundled services, compared to the three (fixed-line, Internet and TV) offered by most cable operators, could also provide it a significant competitive advantage. ^{[3] [4]} The deal would also result in substantial savings, as the companies expect cost synergies of over $2.5 billion annually within three years of the deal closing, primarily on account of the increased scale of their video subscriber base. ^[5]

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1. Press Release, May 18 2014, DirecTV Press Release [↩]
2. MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 3, 2015, Leichtman Research Group [↩]
3. Press Release, DirecTV, May 18 2014 [↩]
4. AT&T to Buy DirecTV for $48.5 Billion in Move to Expand Clout, NYTimes, May 18, 2014 [↩]
5. Investor Briefing, April 22, 2015, AT&T Press Release [↩]