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.
Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!