DIRECTV Needs to Make AT&T Pay Up

The S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  )  were both up 0.16% at 10:22 a.m. EDT. Both indexes closed at all-time highs yesterday and one factor could contribute to driving them higher still: the resurgence of animal spirits in executive suites. Last month, research firm Dealogic said that global corporate acquisitions were at their highest year-to-date volume since 2000 and that technology M&A volume was also ahead of its pace for 2000. Meanwhile, the volume of deals valued at $10 billion-plus stood at $319 billion at the end of April, a 75% increase over the same period last year and the highest year to date since the private equity boom year of 2007. One deal that could soon be added to this total is the potential $50 billion acquisition of satellite television provider DIRECTV (NASDAQ: DTV  ) by telecom giant AT&T (NYSE: T  ) .

At the beginning of this month, The Wall Street Journal first reported that the two companies were in talks regarding a possible tie-up. The Journal reported yesterday that the talks are now at an advanced stage and could produce a deal within a matter of weeks.

DIRECTV is facing slowing subscriber growth and, at a time when consumers like to be able to deal with a single provider for Internet and television, it's unable provide Internet service that is as fast as those of cable or phone companies'.

 AT&T's main catalyst for the deal appears to be another acquisition: that of Time Warner Cable (NYSE: TWC  ) by Comcast (NASDAQ: CMCSA  ) , a $45 billion transaction that, if approved by regulators, would create a dominant cable provider serving close to 30 million subscribers. (For reference, AT&T and DIRECTV have a total of almost 27 million subscribers.) AT&T does not want that shot across the bow to remain unanswered in the battle for American living rooms.

A logical first step for DIRECTV might have been a tie-up with rival DISH Network, but the companies have been unable to pull this off. DISH Network has effectively pulled itself out of the running as a potential "white knight," with its chairman publicly stating last week that the company could not compete with AT&T in a bidding war.

DIRECTV has generated terrific returns for long-term shareholders, smashing the broad market's performance over the past decade. Selling out to AT&T at this juncture in the industry's transformation is not a bad outcome, but management ought to coax a genuine premium of the telecom giant. DIRECTV's stock closed at $87.16 yesterday, 12% higher than on April 30, the day prior to the first report of acquisition talks. DIRECTV have a motivated buyer -- its board ought to push for a triple-digit offer from AT&T.

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