The deal will be done in cash and stock. This means that DirecTV shareholders will be flush with cash to spend once the deal is consummated. Here are some top companies that DirecTV investors can invest in with the cash from the takeover.
AT&T's TV service, aka U-verse, currently has only 5 million subscribers. DirecTV, on the other hand, has 20 million pay-TV subscribers. The acquisition will help AT&T to expand its footprint in the pay-TV business, which is currently nothing to write home about. The merger between the two companies will also bring several other significant benefits to AT&T.
For starters, AT&T will be in a good position to generate additional revenue and income by bundling its mobile plans and Internet together with DirecTV television services.
Companies such as Comcast (NASDAQ:CMCSA) have been very successful at bundling Internet, video, and voice services into one package. This is usually cheaper for customers (but a little less lucrative for the vendors) than having to pay for separate services from different vendors. For instance, two years ago, 70% of Comcast subscribers had a double play on its bundled services, while 36% had subscribed to all three. In 2013, 78% of subscribers had a double play while 43% had a triple play on Comcast services.
This scenario is quite likely to repeat itself when AT&T introduces bundled services to its customers. 27% of Americans currently use AT&T services. This means that roughly 27% of DirecTV subscribers have an AT&T postpaid plan as well. This in turn means that AT&T can potentially lure 14.6 million DirecTV subscribers to subscribe to its own services through the bundled plan.
The lowered cost of the bundled services will quite likely attract other post paid subscribers into AT&T's network. The lowered profitability per subscriber for AT&T due the lower charge for the bundled service will be more than offset by the influx of new customers.
AT&T is also likely to realize significant cost savings through increased cost efficiencies after the merger. DirecTV spends about $873 to acquire a single subscriber. About 12% of this is related to the cost of set-top boxes, while the rest is related to labor costs, advertising costs, and so on. AT&T has most of these services covered in its own balance sheet, and probably only needs to spend a little more to win over its own subscribers to DirecTV services. Since AT&T has roughly 85 million subscribers, it has the potential to get at least another 65 million of its customers to subscribe to DirecTV services at minimal additional costs.
DirecTV sports an operating margin of 8.6% while AT&T's clocks in at 14.3%. By reducing DirecTV's SG&A (selling, general, and administrative costs as a percentage of revenue) from the current 32% to around 24%, the business' operating margin will rise to around 15%, or close to double the current figure. That's good cost leverage.
AT&T's shares might rise considerably in the future from the synergies created by the merger between it and DirecTV
DirecTV has for a long time been popular with investors due to its very strong share buyback program. The company managed to reduce its outstanding shares by a whopping 60% over the last decade, and saw its share price rise by more than 500%.
AutoZone (NYSE:AZO) is ranked second after DirecTV in terms of share buybacks, while AutoNation (NYSE:AN) is ranked third. AutoZone has lowered its outstanding shares by 58% in the last 10 years, while AutoNation has cut back its outstanding shares by 48% over a similar time span. Both companies sell automotive parts and spares.
The U.S. car fleet is aging rapidly, and the average age of cars on U.S. roads has crept up to a new high of about 11.4 years. This could mean more business for auto parts vendors.
AutoZone operates about 5,200 auto parts stores in the U.S. The company's sales grew 7.3% during the last-quarter, while net income and EPS rose 9.4% and 17.8% respectively. The less-than-ringing sales growth is being brought about by the saturation of the American market.
The company's powerful share buybacks program has helped to grow its share price by more than 500% during the last decade, however.
AutoNation is just coming from a good quarter where it saw its EPS jump 16% while its topline grew 7%. The company expects sales growth in the current fiscal year to clock in at 3%-5%, however. This is perhaps the reason why its shares look cheaper than what you would expect. AutoNation shares sport a 12-month trailing P/E ratio of 17.2 compared to the industry average of 18.6. Its shares are likely to continue doing well due its strong share repurchases.
Foolish bottom line
DirecTV shareholders can either choose to buy AT&T shares to enjoy the benefits of the merger, or they can replace DirecTV shares with shares of buyback champ runner-ups: AutoZone and AutoNation.
Joseph Gacinga 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.