The pay-TV industry is a fascinating one to watch right now. As the cable business climbs over itself to consolidate, the satellite-TV game (one that has not seen the same video subscriber flight as cable) has quietly jockeyed for its own advances. On Wednesday night, reports surfaced that the biggest pay-TV business in the industry, DirecTV (DTV.DL), was in talks to sell itself to telecom giant AT&T (T 0.75%). The move would be a huge one, totaling more than $40 billion, and would hold tremendous implications for players across the board -- from rival DISH Network to Internet streaming businesses. Here's what investors need to know.
The rumor
First of all, keep in mind that deal chatter is always happening and that the best way to play the movements is to wait until there is final confirmation. Beyond just the two companies and their investors coming to an agreement, there are huge regulatory implications with a merger of this size. That said, the potential sale of DirecTV to AT&T is an enticing one for investors in either company.
Wednesday night, The Wall Street Journal reported that AT&T had approached DirecTV about a possible acquisition and that "exploratory talks" were under way. If the companies came together, DirecTV and AT&T would become the second-largest pay-TV business in the United States. DirecTV is already the largest worldwide, with a massive and nearly uncontested presence in Latin America.
We know that DirecTV is open to options, as CEO Mike White has repeatedly made clear in investor and press communications. The company had discussed merging with DISH Network, leveraging the massive subscriber base of DirecTV and DISH's highly valuable spectrum portfolio. AT&T CEO Randall Stephenson is clearly compelled by media consolidation as well, as he recently noted regarding the potential Comcast-Time Warner Cable acquisition.
What it means
There is a race to invade homes around the U.S. and to tie in as many services as possible. Joining a telecom behemoth with a content distributor giant makes sense and would give the company substantial bargaining power when it came to content costs and consumer bundling packages. As Internet streaming businesses have disrupted the traditional pay-TV landscape, and the U.S. telecom market matures past its growth stage, there is a rush to find a way to keep the profits growing.
Similar to the scale of the Comcast-Time Warner Cable deal, the potential effect on the industry is huge -- reaching cable businesses, telecoms, streaming businesses, content owners/creators, and most importantly -- consumers. The end user's options may be getting more limited as competition is put under strain by the need to consolidate.
Whether the government would approve the deal hinges largely on what happens with the Comcast acquisition. If Comcast is allowed to carry through its purchase of the second-largest cable business in the U.S., then there is a strong likelihood of DirecTV and AT&T joining forces. AT&T investors would benefit by owning a company that dominates the Latin American pay-TV market while keeping hold of a domestic telecom powerhouse. Much of the cable industry suffers with video subscriber losses, but DirecTV continuously adds new ones and increases the average revenue per user in its existing ones. DirecTV investors would benefit by having a secured future in the quickly tightening industry. Both companies' competitors (and respective investors) would feel the pinch.
The immediate takeaway is to do nothing, but this serves as yet another reminder (as if we needed one) that the industry is changing at a rapid rate. Keep an eye on investments in the space, as few know what the landscape will look like just a few years from now.
