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.
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.
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.