Why Verizon Won't Buy DirecTV

The Wall Street Journal thinks that Verizon Communications (NYSE: VZ  ) could be interested in buying satellite TV provider DIRECTV Group (Nasdaq: DTV  ) soon. In fact, the Journal believes there might be a race to acquire DirecTV between Verizon and archrival AT&T (NYSE: T  ) .

No need to jump the gun, guys. Here's why I think this speculation will come to nothing.

Verizon doesn't need DirecTV
Verizon CEO Ivan Seidenberg does seem interested in making video service the core of his fixed-line business, edging out the current focus on voice communications. And yes, buying DirecTV or DISH Network (Nasdaq: DISH  ) would give an immediate boost to that business. But the FiOS video service is doing fine on its own.

The FiOS TV service now reaches 10.3 million American households, and the overall FiOS network now reaches 43% of Verizon's service area for wireline voice products. The company is clearly committed to making FiOS available to the majority of its phone-line customers. And a stunning 25% of potential FiOS TV customers are already actual customers -- up from 20% a year ago.

By way of comparison, there are 115 million TV market households in the U.S., according to Nielsen. DirecTV's 18 million American subscribers amount to a 16% adoption rate. Verizon is still building the FiOS network, and the customer attach rate is high and rising. There's no need to take steroids when your workout program already gives you the muscle you wanted.

... and really can't afford it
Besides Verizon's limited need to grow by acquisition right now, DirecTV is gosh-darn expensive. Its $27 billion market cap grows to a $30 billion enterprise value when you take cash and debt into account. And that's without any buyout premium.

Oh, and DirecTV has a fresh, profitable co-marketing deal with AT&T. If Verizon wants to buy DirecTV, there'd be deal-breaking penalties involved. This is a lot of moola, and Verizon already carries about $64 billion of net debt. A stock-swap deal would be possible, but this option would be less attractive to DirecTV investors, and it might not pass the required shareholder vote.

OK, smart guy, what do you suggest?
If Verizon really does want to buy video subscribers, DISH Network would be a far more affordable and less problematic option. But I still don't see the need.

Verizon could put its massive cash flows to far better use inside its traditional telecom world. Sprint Nextel (NYSE: S  ) is struggling for air, and it runs on technology that's pretty compatible with Verizon's. Or perhaps Verizon could snap up Palm (Nasdaq: PALM  ) and leverage its WebOS platform across a diverse line of phones. That move would both give Palm's platform the marketing muscle it needs (and give Palm investors a generous premium to boot) and make Verizon the first telecom network provider that also makes its own cell phones. That competitive advantage could be worth a few billion dollars, right?

Feel free to discuss Verizon's options in the comments below, dear Fool.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Sprint Nextel is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 29, 2009, at 11:26 AM, SreeRama wrote:

    Yes, they need to do more so they don't get marginalized into a "utility" company. These telecom giants were in the process of gaining and keeping control of much of the things on their wireless phones side of the business until Apple stepped in and redrew the rules of the game. There is an interesting opportunity for Verizon if it were to acquire Palm; especially because of the much talked about WebOS platform

  • Report this Comment On September 30, 2009, at 6:01 AM, squawk101 wrote:

    Agree with author. This is a non-story. No way will VZ buy DirecTV. More likely an attempt to drive up stock price to make even more expensive for AT&T.

    AT&T needs a scaled video solution. U-Verse is not & will never be the scaled video solution to necessary to achieve economies when purchasing programming from the content providers.

    When it comes to telco plant, AT&T's footprint dwarfs that of VZ. First, VZ is concentrated in the Northeast, having its legacy in the Bell Atlantic, NYNEX territories. When it acquired GTE, it merely acquired isolated territories in various markets throughout the country. In short, very EZ for VZ to push FTTH (FiOS).

    Not so with AT&T. With it's acquisition of Bell South, AT&T's footprint pretty much covers the entire country with the exception Quest's low density territories in the Northwest & Mountain states, & the Northeast (with exception of SNET in CT.

    Bottom line, AT&T needs a scaled video solution that only as sat company can offer, if it expects to compete with the MSOs (cable) going forward where combined services of landline, multichannel video, Internet & wireless will be key to retaining & growing subcribers.

  • Report this Comment On October 05, 2009, at 11:53 AM, bluntturd wrote:

    I am a Verizon employee and I will tell you why your wrong. First of all, the focus is on video services but Fios is only adding 300,000 net subscribers a quarter. In New Jersey, the Fios build out will cease January 1 2010. Fios penetration is only about 20% of households passed which is below managements expectations. The company is losing copper landlines like crazy and the cell phone market in the U.S. is nearing saturation. Wireless and Fios are the companies only sources of revenue growth so it is likely any investments would occur in these areas. Now think about this, if Verizon acquires Direct TV they will pick up 18 million television subscribers without running a single line. This would be significantly less outside plant to maintain which would save money in the long run.The company is spending billions of dollars on the Fios project, but is disappointed with the achieved ROI. Also, the company would require a much smaller workforce, which is already the trend. Verizon is in the midst of massive layoffs (8000+) and is desperate to save on labor expenses. I believe the Fios and DirectTV network could be linked at the head-end and be one contiguous network. Now for the legal issue, I'm sure the antitrust lawyers are hard at work examining how this deal with examine the competitive structure of the industry. However, the FCC recently overturned a rule limiting the size of a cable TV provider to 30% of a given market. A Verizon and DTV merger would be the second largest TV provider in the nation. I believe this deal is extremely possible but fear the ramifications for my own employment. Lastly, I really don't see the synergy for Verizon to acquire Palm, why would Verizon, who wants to be a content provider want to become an equipment manufacturer?

    Is there any precedent for a deal of this type? It just seems an acquisition of a TV company would provide a much better fit.

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