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AT&T Investors: Should You Be Worried About the FCC?

AT&T (NYSE: T  ) investors have bad memories when it comes to high-priced and high-profile acquisitions getting blocked by the Federal Communications Commission, or FCC. AT&T tried to acquire T-Mobile (NYSE: TMUS  ) a couple of years ago, but it was blocked by the FCC for being anti-competitive and anti-consumer. Therefore, with AT&T announcing an even larger $45 billion buyout for DirecTV (NASDAQ: DTV  ) , investors are likely wondering if it will be approved by regulators.

Why was T-Mobile blocked?
In the U.S., there are four major national telecom carriers, with AT&T and T-Mobile being numbers two and four, respectively. In 2011, AT&T attempted to acquire T-Mobile for $39 billion, and if successful, it would have given AT&T 132 million connections to mobile wireless devices, translating into a 43% market share.

This high market share was what came into question, and by reducing the number of national carriers from four to three, the FCC found it would have a negative impact on jobs, the competitive landscape, and could create higher prices for consumers. Thus, it was blocked.

As a result, AT&T paid $6 billion, which included $3 billion in cash to T-Mobile as part of the breakup fee and $1 billion in valuable spectrum. Since then, T-Mobile has offered much more competitive pricing, its network has become more reliable, and its stock has soared due to both fundamental improvements and continued takeover chatter.

Why is DirecTV different?
So, the failed acquisition attempt of T-Mobile by AT&T worked out well for T-Mobile, as the combined $6 billion in cash and assets helped the company to restructure and gain a more competitive edge. However, in regard to DirecTV and this acquisition, no such outcome will occur.

For one, DirecTV will not receive a breakup fee if regulators reject the deal, as reported by Reuters, and also, this is a deal with a very high likelihood of success. In fact, the FCC and Department of Justice only have one real complaint in regard to the acquisition creating an unfair competitive advantage. The concern is that an AT&T/DirecTV merger will cut the number of U.S. video providers from four to three for roughly 25% of households. In other words, one-quarter of households may be affected.

With the T-Mobile merger, the entire industry was affected, as there were only four total carriers. But, with video, there are countless providers, some larger than DirecTV, and its 26 million combined TV customers does not pose an obscene advantage, unlike the T-Mobile merger.

Moreover, TV isn't even AT&T's core service -- it's a telecom giant, meaning that all this merger will do is strengthen the company's No. 3 segment, behind wireless and broadband. Therefore, it would be tough to argue that an unfair advantage exists in this equation.

Final thoughts
The end result of this acquisition attempt is that it will ultimately be approved, likely with little resistance from the government. However, due to AT&T's failed attempt with T-Mobile, investors are naturally skeptical, which might be a great advantage to investors.

Specifically, AT&T is buying DirecTV for $49.5 billion in a cash and stock deal worth $95 a share. Currently, shares of DirecTV are trading at $84.65, meaning there are still gains of 15% on the table for investors who take advantage and are confident of the buyout. In terms of downside, DirecTV shares are only 10.5% above the closing price of $77.60, which was the price prior to the deal being announced. Hence, there is more upside than down, and in gauging the likelihood of this merger, DirecTV looks like a good, safe bet for double-digit gains.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 


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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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