Why the Deal for DIRECTV Is a Long-Term Positive for AT&T Inc.

AT&T  (NYSE: T  ) appears to be that much closer to a deal to buy satellite TV provider DIRECTV  (NASDAQ: DTV  ) . The deal could be worth almost $50 billion. That is a big acquisition to integrate for company of any size. However, the positives seem to outweigh the negatives. The move will position AT&T as a leader in wireless services and pay-TV, while also giving AT&T a strong foothold in the fast-growing Latin American market. Also, don't forget that AT&T offers a dividend yield of nearly 5%. Could AT&T become an income and growth story?

A quick deal overview
The existing management of DIRECTV will continue to run the business as an operating unit of AT&T. The combination of AT&T and DIRECTV will create another giant in pay-TV of around the same size as Comcast  (NASDAQ: CMCSA  ) , if its acquisition of Time Warner Cable  (NYSE: TWC  ) comes to fruition. The big issue is the regulatory hurdles that the deal faces.

Time Warner Cable is up only 5% since Jan. 1. Meanwhile, DIRECTV is up 21%. The thing about the Comcast-Time Warner deal is that it marries the two largest cable companies in the U.S. Unlike the AT&T and DIRECTV, deal which marries two companies in different industries.

The changing scenario in the telecom industry
AT&T's purchase of DIRECTV will combine the second-largest wireless company in the U.S. and the second-largest pay-TV operator. This will accelerate the convergence of wireless networks and video distribution.

AT&T is getting a national satellite TV presence, which will pair nicely with its wireless and broadband Internet offerings. This comes as the number of customers watching video online continues to increase. The Comcast deal likely fueled AT&T's move, where the marrying of Comcast and Time Warner will strengthen the idea of using the Internet to deliver video.

Why AT&T is making the deal
One of the main reasons AT&T is making the deal is to improve its ability to bundle services. By incorporating the pay-TV service with 20 million customers into its portfolio of telecom services, the company hopes to create a more robust bundle of services for customers. The growth of customers wanting wireless services is declining, and the rationale for the deal is to get more money from these, as well as existing customers.

Currently, AT&T has an average revenue per user, or ARPU, of around $170 per month, whereas DIRECTV generates more than $102 per month from pay-TV alone. The bundling of these services should see a significant jump in revenue. It currently has 11 million customers for U-verse, but only 5.7 million receive TV. The combined company would also have much greater advantage in negotiating prices with content providers.

The performance of DIRECTV
The numbers for the first quarter were quite good for DIRECTV, with revenue growing by 6%. The company added 361,000 subscribers in Latin America and 12,000 in the U.S. EPS for the quarter grew by 14% to $1.63 a share. Latin America remains DIRECTV's key growth avenue. Only about 20% of the total company revenue came from Latin America, but it accounted for around 95% of the company's subscriber growth last quarter. There is also a big opportunity to continue growing in the area, since only around 40% of households in Latin America subscribe to pay-TV.

Pros and cons
First, the cons: AT&T has its own TV service, and DIRECTV is not going to contribute any wireless spectrum, which would have been of value to any wireless operator. DIRECTV will be a large acquisition to digest, and this is on top of any regulatory problems that may arise.

However, one major pro would be that AT&T is almost exclusively a U.S. company, and the acquisition would add important geographical diversification by way of Latin America. Moreover, DIRECTV has an extensive satellite network with unparalleled penetration into rural or remote locations, and it would cost AT&T a lot to set up this kind of distribution. It also has exclusive distribution rights for major sporting events in golf and tennis, in addition to the NFL.

Bottom line
There are plenty of synergies in the transaction, and AT&T could be a big winner in the long term. AT&T is already one of the more attractive income stocks, with a dividend yield around 5%. In addition, the DIRECTV acquisition could help AT&T boost top-line growth. For investors looking to play the telecom industry, AT&T is worth a closer look.

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  • Report this Comment On June 03, 2014, at 2:57 PM, smalls6262 wrote:

    "AT&T is getting a national satellite TV presence, which will pair nicely with its wireless and broadband Internet offerings. This comes as the number of customers watching video online continues to increase." This is a true mouthful one can fail to comprehend.

    “video online continues to increase” Just the CONCERN DISH's Charlie Ergen has pointed out. The move to streaming video content (internet based TV at 4k and 8k quaility) is a threat to satellite and cable providers revenue going forward. DISH head acknowledges the long term trend and has commented DTV won't get T what it needs for the future of communications. The future is in fiber with G.fast technology now entering test markets in Europe set to bring down costs of deploying fiber like speeds as much as 80%. Yes, 80%. The bulk of fiber deploy expense to ISPs is final leg into home. G.fast tech utilizes a fiber backbone to the local neighborhood node (size of small shoebox) and then G.fast uses existing copper into the home with reported speeds of 500 mbps-1gbps. Speed determined by distance from node into the home with 100m being ideal. One test had 1.3 gbps at 70 meters. DSL gets you less than 10 mbps (note mega vs. giga) while some cable based ISPs will charge you arm and leg for +30 mbps. You should be aware a fiber backbone line is already in place across most of U.S. including a great number of rural towns.

    With Ergen acknowledging the long term trend is streaming video consumption (internet based), AT&T is buying a satellite asset with its large revenue base in the U.S. about to come under pressure after peaking - take note the number of new subscribers. DTV to be cannibalized by T's own fiber as well getting hit by other fiber ISPs in the 21 states it has wired line. GOOG deploying fiber as well as other regional carriers operating fiber within those 21 states. T won't even be able to cannibalize satellite revenue in the 29 states it doesn't have wired line assets. That satellite revenue will all be fed to the likes of Verizon FiOS, GOOG, and other regional fiber ISPs.

    Note Latin America is 40% saturated TV market but do you know ARPU for a subscriber in a Latin America country such as Belize vs. U.S. market? Full movie bundled package including HBO goes for $22.50/month in Belize. You should understand there is a reason for low penetration in Latin American markets. These are second and third world markets which are more concerned with food on the table and paying an electricity bill. The revenue potential in L.A. more than offsets the large revenue base in the U.S. which is set to come under greatly increasing downward pressure as people move to streaming video (online). Streaming video that is more convenient with on demand content (at a viewers leisure upon content producers release instead of headaches setting recording device) AND will be 4k and 8k quality video feed as fiber/g.fast networks are deployed. Now we have a reason for those very high def TV sets! Take note DISH has announced it is launching a WEB based, no-frills bundle by end of 2014.....Ergen sees the writing on the wall but Stephenson apparently doesn't OR is doing a major head fake to pull out speculation in VOD share price. Ton of web based video competition mounting for satellite and cable. Netflix, Amazon Fire/Prime, Apple TV, Hulu, direct streaming from content suppliers such as Bloomberg, HBO Go, NHL, NBA, MLB et al. Satellite TV has matured in the U.S. and is set to slide as “video online continues to increase”.

    DTV purchase is a long term dilution to existing AT&T stockholders. T shareholders have to hope this deal falls apart by means of NFL Sunday Ticket contract not being renewed between NFL/DTV, regulators block it because 25% of U.S. pay TV market will have a competitor removed due to overlapping U-verse/DTV markets with this proposed deal, OR T simply walks away under some other clause on a major head fake here. Notice T has no breakage fee? With all respect, this DTV deal is bad for long term T shareholders. Satellite pay TV is a soon fading technology avenue. DISH is capitulating. Is Stephenson blind or just head faking VOD? T shareholders have to hope this is just a really awkward head fake.

  • Report this Comment On June 05, 2014, at 10:53 PM, almypal1763 wrote:

    I disagree with the guy above. He is uninformed

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