A New Era Rises for Cable TV

The face of the cable TV and communications market is moving into a new era.

May 19, 2014 at 4:25PM

Hot on the heels of the announcement by Comcast (NASDAQ:CMCSA) on its website that it is planning to purchase Time Warner (NYSE:TWX) come rumors in a story in the Wall Street Journal that AT&T (NYSE:T) may be planning to buy DIRECTV (NASDAQ:DTV).

In the story, it is cited that unnamed sources close to the situation had said that AT&T had made an approach to purchase DIRECTV. This is surprising news, as only recently DIRECTV was renegotiating again for a merger with Dish Network, after its last try was rejected by regulators over 10 years ago, according to the Wall Street Journal.

A good fit to move forward
This deal will not be cheap as according to the Wall Street Journal, DIRECTV has a market capitalization of around $40 billion. The deal, should it go through, makes a lot of sense. Combining AT&T's U-Verse subscriber base of 5.7 million with DIRECTV's base of 20 million would put the combined company on a footing almost level with Comcast and Time Warner after their merger.

With the Comcast deal set to complete by the end of the year according to the Comcast website, though it's still not certain to receive approval from U.S. antitrust regulators, the rumored AT&T deal still has a long way to go. Details have yet to be made public on how the companies would complete the deal, but according to the Wall Street Journal the deal will involve a combination of cash, stock and other assets.

The Dallas Morning News has also reported that anonymous sources have said that both AT&T and DIRECTV have formed due-diligence teams to review the potential purchase. With a market capitalization of $185 billion dollars, AT&T can certainly swallow DIRECTV without too much effort.

The report out of Dallas also said that one reason for the proposed merger was DIRECTV board's concern with its inability to offer an effective Internet access broadband service. The deal will create a combined company that will be able to offer a very wide range of services. AT&T would then be able to bundle home Internet, pay TV, and mobile services in a single deal for a large proportion of the population.

Cable industry consolidation
Comcast's $45-billion merger with Time Warner will create much of the same situation. It will make Comcast the largest broadband-service provider in the U.S. with approximately 30 million customers. According to the announcement on the Comcast website, the terms of the Comcast deal have already been provisionally agreed to as an all-stock transaction, with each Time Warner shareholder receiving 2.875 shares of newly issued Comcast common stock.

This merger solves the problems that Timer Warner has been having in effecting its turnaround plan. It also benefits both companies' customers as they will receive a greater choice of channels.

This spate of giant mergers has been long overdue as the mature U.S. cable market is creating almost no new customers and is ripe for consolidation. This double-merger situation may also help when the Department of Justice and the Federal Communications Commission evaluate both deals. The issue for AT&T and DIRECTV is that they must prove that the deal is in the best interest of the public and can offer consumers greater benefits.

With the Comcast and Time Warner merger going on at the same time, this will be less of an issue as the market consolidation will end up fairly evenly balanced. Then again AT&T does not have a great track record with the FCC as last time the FCC blocked the T-Mobile buyout deal and this cost AT&T $4 billion .

Final Foolish thoughts
To make the similarity between the AT&T and Comcast deals complete, Comcast is also rumored to be looking to enter the wireless market . This was announced in a report that was issued at the same time when Comcast sent its defense of the merger with Time Warner to the Federal Communications Committee on Tuesday, as reported by CBS News.

By entering the wireless market, Comcast would strengthen its case for approval of the merger as it would increase competition in an area that is regarded as a threat to cable and broadband. It would also allow it to offer a bundle package equivalent to the one that AT&T may soon be providing. However, as it turns out, it seems certain that the face of the cable TV and communications market is moving into a new era.

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Haris Qureshi has no position in any stocks mentioned. The Motley Fool recommends DirecTV. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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