The 2 Dumbest Things AT&T Inc. is Saying To Support the DIRECTV Deal

AT&T (NYSE: T  ) wants to buy satellite TV vendor DIRECTV (NASDAQ: DTV  ) for $48.5 billion. Regulators are warily watching this proposed deal, and AT&T already has a history of failed megamergers. Being a Dow Jones (DJINDICES: ^DJI  ) blue chip with a $181 billion market cap has not guaranteed AT&T rubber-stamp approval of its biggest buyout bids. Today AT&T has a fresh Rule 425 filing on tap to support the satellite takeover. The Dow is trading blithely just in the green, but AT&T investors are backing away slowly as the telecom stock dropped 0.7%.

The telecom giant is doing its best to impress market regulators, in a mix of press releases and SEC filings. In the process, AT&T is dropping some crazy one-liners. Some of them sound like downright jokes.

Here are a couple of the silliest reasons for approving the DIRECTV deal that AT&T has come up with so far, including a zinger from the Rule 425 filing.

Original images for this edit acquired from DIRECTV and AT&T.

This is a unique opportunity that will redefine the video entertainment industry and create a company able to offer new bundles and deliver content to consumers across multiple screens -- mobile devices, TVs, laptops, cars and even airplanes.

Sounds great -- but did AT&T CEO Randall Stephenson forget that his company today provides all of these services?

Through its U-verse fiber-based network, AT&T already sells TV broadcasting services to consumers. U-verse has 11 million broadband subscribers and 5.7 million TV service customers. The package accounts for $13 billion of annualized revenue, on pace for 30% annual growth. It's 60% of AT&T's consumer revenue today.

Moreover, the only way AT&T can package DIRECTV's TV service with a credible broadband service is by bundling it with U-verse fiber. Copper-line DSL barely qualifies as broadband anymore, given the hard technical limits on upload and download speeds. Sure, you can match a fiber network's super-fast connections on a DSL network -- but only if your DSL provider has invested in the latest and greatest back-end technology and you live within a few hundred feet of AT&T's connection centers.

In reality, AT&T is thinking broadband-and-satellite bundles in areas already served by its U-verse network. Elsewhere, you're lucky to get an AT&T connection fast enough to consume low-grade digital video services.

So this entire argument rings hollow. With DIRECTV under its belt, the company will surely grow its TV broadcasting reach. But it's disingenuous at best to say consumers will gain amazing bundles from this combination. And don't forget that AT&T already resells DIRECTV subscriptions.

There's absolutely nothing new and innovative about putting DIRECTV together with AT&T, and this deal will certainly not "redefine the video entertainment industry" in any way that consumers will appreciate.

The economics of this transaction will allow the combined company to upgrade 2 million additional locations to high speed broadband with GigaPower FTTP (fiber to the premise) and expand our high speed broadband footprint to an additional 13 million locations where AT&T will be able to offer a pay TV and high speed broadband bundle.

AT&T CEO Randall Stephenson, seemingly thinking up new DIRECTV wisecracks. Source: AT&T.

That's merger synergies at work, according to AT&T. Buying DIRECTV would afford AT&T the ability to pull fiber cables to 15 million new households, "mostly in rural areas."

This is possible thanks to $1.6 billion in annual "cost synergies," AT&T says. Or, Ma Bell could keep $67.1 billion in her purse simply by not absorbing DIRECTV (including $18.6 billion of net debt balance that AT&T will take over from the purchased company), and spend a small portion of that cash to upgrade her network instead.

It's not like AT&T cannot afford network upgrades without DIRECTV in the house. I appreciate the long-term value of adding that company's $2.8 billion of annual free cash flow, and those cost savings from cutting down overlapping business operations will add to that wealth. But at the end of the day, AT&T could spend a lot on a big, splashy buyout -- or spend a little on improving and expanding services to its current customers.

Either way, AT&T could easily reach those 15 million mostly rural households. Saying that the network expansion relies entirely on the DIRECTV deal is another big joke. And I don't think the SEC and the FCC are laughing.

The real story
Let's get real.

AT&T wants some of DIRECTV's juicy cash flow, for sure. Service bundling opportunities might also increase, but not to the extent that the company is claiming in these documents.

But when you add up synergies and existing cash flow, it'll still be more than 15 years before the acquisition starts pulling its own weight. Even longer, if you account for the time value of money. There's a better-than-zero chance that DIRECTV's current operations never will be worth the investment at all.

The real reason why AT&T is interested in DIRECTV is simple: The satellite network would instantly expand AT&T's addressable market across two continents, as DIRECTV serves both North and South America.

A satellite-based foothold in places like Brazil and Mexico could be the starting point for an AT&T-branded mobile network in those markets. The company could also go on a buyout spree south of the border, picking up local phone and cable networks wherever the economics make sense. And then AT&T can start claiming that DIRECTV enables brand new bundling opportunities.

The things AT&T is saying about DIRECTV sound funny to Americans, but start to make sense in an imperialistic perspective.

But AT&T will never get that far unless it passes the domestic buyout hurdles first. With arguments like these, I don't see it happening.

I can't wait to see what Ma Bell says next. She might even have to make specific promises on a billions-of-dollars scale to pull this deal off.

Imagine that.

Your cable company is scared, but you can get rich
This actually looks like a terrible time to invest nearly $70 billion in a traditional broadcaster. Cable's going away, and satellite TV services can't be far behind. But do you know how to profit from this revolution? 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 the usual suspects. 

 


Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 04, 2014, at 2:55 PM, siwanoy wrote:

    Excellent article, but it still gives too much credit to T's management. Obliterating management's express rational for this (silly) merger is well put, though relatively easy relatively easy (LTE is not a proven primary video delivery mechanism as compared to landline), but making the assumption that they therefore must have a different angle probably is giving too much credit. Remember, they had a solid investment in Carlos Slim which they gave up for this deal and any new opportunities are highly likely to be as good. Who in their right mind would want to compete with Carlos on his home turf?

  • Report this Comment On June 04, 2014, at 7:22 PM, siwanoy wrote:

    Somehow the prior comment got garbled. Here it is corrected:

    Excellent article, but it still gives too much credit to T's management. Obliterating management's express rational for this (silly) merger is well put, though relatively easy (LTE is not a proven primary video delivery mechanism as compared to landline), but making the assumption that they therefore must have a different angle probably is giving too much credit. Remember, they had a solid investment in Carlos Slim which they gave up for this deal and any new opportunities are highly unlikely to be as good. Who in their right mind would want to compete with Carlos on his home turf?

  • Report this Comment On June 04, 2014, at 7:25 PM, almypal1763 wrote:

    Who is this clown trying to write an article. You need an education and then you need to do your research before making a fool of yourself.

    1. AT&T is simply stating they will be able to get Direct TV customers to get internet, phone, and cable as an option. He wasn't referring to the existing Uverse customers.

    2. AT&T has plenty of revenue from its own business. It does not need it from Direct tv.

    3. AT&T simply wants to offer other areas in the US and Latin America an option besides Comcast

    You are an idiot and very biased. You shouldn't be allowed to right articles since you are not educated

  • Report this Comment On June 05, 2014, at 3:34 PM, smalls6262 wrote:

    Almypal1763, you might want to get educated.

    1. AT&T has wired line in only 21 states and doesn't cover every market even within those states. Sure, T has nationwide mobile but you should also keep in mind this bundle has already been available as a third party offer. A good many of populace already know about bundle possibility in DTV U.S. market.

    2. It isn't about revenue, it is about free cash flow which is a big difference.. FCF is always strained by high capex. If T is in such great shape then why are they issuing preferred stock to cover a large gaping hole in pension shortfall? It is excessive by most standards to have that large of a percentage of their pension being backed by T's own stock. T is after FCF but is short sighted given the U.S. satellite market is mature (check the paltry net gains in subscribers) and FCF will be pressured going forward. Streaming video is going to give satellite and cable bundlers fits going forward and why DISH's Ergen has capitulated in announcing a web based bundle to be launched by end of 2014. Streaming IP has absolutely nothing to do with satellite.

    It is a losing proposition to see thin margin ARPU in Latin American DTV subscribers as a "potential" growth tool (Belize DTV subscribers pay just $22.50/mo for full movie bundle including HBO etc - think poverty levels) while recognizing the larger revenue U.S. market is going to come under very heavy pressure by streaming TV. T won't recapture, I stress WILL NOT, recapture the bulk of satellite subscriber defections to streaming. DTV operates in all 50 states with T land line services in only 21 states. LTE(mobile) doesn't offer the quality of fiber streaming with LTE experiencing spectrum capacity issues already - having log jam issues in some heavily populated areas. 29 states defecting DTV subscribers will be lost to other wired line streaming providers. 21 states they will lose to some other competitors as there is other wired competition within those markets. GOOG moving into T states, Frontier, CenturyLink and many, many other small regional/local FiOS providers exist within those 21 states. Is T really that ignorant to think "potential" of low margin ARPU in Latin America (40% saturated TV market in 2nd and 3rd world incomes) for a U.S. satellite market set for deterioration of the inferior technology?

    The author is spot on. T could look to grab some cell subscribers in Latin America but good luck thinking the bundle will get them very far. Stephenson is buying a fading technology and soon to fade FCF in DTV. Mark it and come back to this in five to ten. You, and it appears Stephenson, are playing on a short sighted field. Financial engineering is the likely motive at the expense of long term AT&T shareholder dilution.

    Telefonica and America Movil/Carlos Slim will have a few things to say about South America ambitions. Maybe Slim and Ergen crawl in bed together as a counter move after Stephenson just gave Slim a back door injection after increasing working agreements last Summer. Slim or Ergen should buy a minority stake in the other and you have an immediate bundled competitor in Latin America to AT&T/DTV. It is noted DTV is already said to be getting competitive pressure in Latin America, notably Brazil. One should note EchoStar/DISH didn't even have a Brazil satellite license until two years back. Telefonica and EchoStar/DISH were in talks late last year to form a joint venture to launch the TV service - and likely a bundle. Those talks fell apart a couple months later Dec.'13 but it opens the door for Slim to make for a bundled move. TEF might come back to the Ergen table given T's move for DTV. Stephenson paying a growth price for a mature technology and a mature U.S. market that is set up for decline with the onset of fiber in the U.S.

    Last note, study "G.fast" which received standardization in April and most current estimates predict commercial deployment beginning first half of 2015 in Europe. It won't take much for this tech breakthrough, using final leg copper into the home (giving 1gb, or 500mbps simultaneous up/down), to find its way across the pond. Said to reduce the cost of fiber network install by 80% with one estimating 90%. =huge drop in ultra high speed Internet deployment cost=streaming TV ON DEMAND.

    Good article by the author but I took just a step farther.

  • Report this Comment On June 05, 2014, at 10:28 PM, almypal1763 wrote:

    To Small Penis above:

    You might want to do your research, because if you would be educated and knowledgeable you would know AT&T offers VOIP phone service throughout the 50 states in the USA, as well and land line services in its 21 state territories. Also, Yes it is about Revenue and making money.. its always been about the profit and revenue. AT&T have plenty of Free Cash and made over $136 Billion in revenue in 2013.

    All companies including Verizon, Dell Computers, and United Healthcare all major corporations have had to fund the pension plan. That is nothing new.

    AT&T is in all avenues in bring in Revenue and free cash flow:

    1. AT&T has 116 Million wireless subscribers bring in billions each quarter in revenue. 98 % of customer have smartphones.

    2. AT&T has 11 Million Uverse Internet customers and 6 million Uverse Cable customers and growing and getting more each quarter and bring in Billions of dollars each Quarter.

    3. AT&T has started providing Digital Life Home Security Service in 2013 and already has over 10 million customers.

    4. AT&T will now be providing 4G LTE service to all 2015 Cars called Connected Car in the USA.

    5. AT&T will also be providing 4G LTE on all Airlines and Airports throughout the United States at the end of 2014 that will bring in billions of dollars.

    6. AT&T is now providing 300 G Internet Service throughout the United States not just in 21 States, but all over the USA which will bring in billions...

    Directv is a Great Purchase because:

    1. Directv is used on all Airlines to watch movies and this is a great revenue maker for AT&T to add Uverse to Airlines and Airports throughout the USA and the World.

    2. Directv has over 20 million subscribers that can get mobile service, VOIP phone service, and Internet Service.

    3. AT&T will be able to bring service to South America as well .

    Make no mistake, AT&T has been around since the 1800's.. they will be successful in everything they do!!!

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