3 Reasons Berkshire Hathaway Inc. Will Hold a Big Chunk of AT&T Inc.

As the largest shareholder of DIRECTV will Berkshire Hathaway hold now that the companies been acquired by AT&T?

May 25, 2014 at 9:00AM

The announcement of AT&T's (NYSE:T) acquisition of DIRECTV (NASDAQ:DTV) last Sunday could have far-reaching consequences for the communications industry as a whole. For Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) however, the deal means a big pay day. 

Berkshire's Todd Combs and Ted Weschler have a combined 34.5 million shares of DIRECTV worth 2.8 billion. If the merger is approved, AT&T will purchase DIRECTV for $95 per share -- $28.50 per share in cash and the rest in stock. This would equate to a Berkshire pay-off of roughly $1 billion in cash and 64 million AT&T shares with a current market value of $2.3 billion. 

While Combs and Weschler have publicly supported the deal, it's unclear if they would hold AT&T long-term if the merger gets approved. However, I believe there are three reasons AT&T will be a mainstay in Berkshire Hathaway's portfolio. 

1. Growth opportunities
The combination of the two companies will allow for unique and innovative bundling of services.

This should make AT&T more compelling to consumers and more competitive with cable companies. This should also open up incredible cross-selling opportunities. As AT&T's CEO Randall Stephenson suggested in the company's conference call last Monday, AT&T has a low penetration of DIRECTV's customer base.  

Moreover, DIRECTV is "Latin America's leading pay TV provider" with more than 18 million customers. AT&T suggested this market has "untapped penetration" and creates significant growth opportunities. 

2. Strong financial position
Growth opportunities are just that, "opportunities" -- as long as the companies have the financial capabilities to seize them. AT&T is planning to acquire DIRECTV for $48.5 billion. 30% of which, roughly $14.5 billion, will be in cash. 

As AT&T noted in the conference call, this merger will not infringe on the company's ability to be active in next year's spectrum auction (in which AT&T will bid on the rights to transmit signals over valuable wireless airwaves). In fact, AT&T suggested it plans to spend at least $9 billion at the auction. 

Ultimately, it's AT&T's titan-like financial strength that should make Combs and Weschler confident the company will follow through on some of these incredible opportunities.

3. Historical precedent
In 2005, Buffett held a large position in the razor giant Gillette when it was acquired by Proctor and Gamble. When Buffett was asked about the merger, he noted that instead of owning a large share of the razor market, he now owns a smaller share of dozens of fantastic businesses. Berkshire Hathaway still owns shares Proctor and Gamble today. 

I believe the AT&T and DIRECTV merger is the communications version of that deal. Instead of owning a large percentage of the pay-for TV market, Berkshire will own a smaller percent of several powerful names with, as AT&T suggested, "unparalleled video content opportunities across mobile, video and broadband." 

The last word
The merger of AT&T and DIRECTV seems like a natural fit, it drastically improves AT&T's competitive position, opens up significant growth opportunities, and I believe it will benefit both consumers and shareholders. As long as regulators agree, the two companies' combined effort would create a powerhouse company that would fit perfectly in Berkshire Hathaway's portfolio.

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Dave Koppenheffer has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway and DirecTV. The Motley Fool owns shares of Berkshire Hathaway. 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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