8 Compelling Reasons the AT&T Inc. and DirecTV Deal is a No-Brainer

Four months ago Comcast (NASDAQ: CMCSA  ) (NASDAQ: CMCSK  ) announced that it planned to acquire Time Warner Cable (NYSE: TWC  ) for $45 billion.

The deal gives the combined juggernaut 30 million pay TV subscribers, $1.5 billion in cost savings, accretive (increased) free cash flow per share, and further negotiation advantages when buying TV programming. In addition, the stock-for-stock deal does not trigger a tax event for Time Warner shareholders.

Comcast CEO Brian Roberts calls the deal "an exciting opportunity for our company, for our customers, and for our shareholders." 

He's right. The reason for the acquisition is simple: consolidation. The combined company grabs a deeper market penetration in the TV and Internet businesses and is now capable of cross-selling each other's services and providing a better customer experience by "upgrading" customers to the better service.

For example, Time Warner subscribers will be rolled into some of Comcast's products, giving the new customers more than 50,000 video on demand (VOD) choices and over 300,000 streaming choices on XfinityTV.com. 

Following suit
AT&T (NYSE: T  ) also consolidated to remain competitive, signing a deal with pay TV provider DirecTV (NASDAQ: DTV  ) . The move is smart for AT&T, which bulks up its customer base, provides opportunities to increase revenue per customer, and gives the combined company a national platform to distribute its TV, Internet, and mobile services.

The move was a good one. Here are eight reasons that the proposed AT&T-DirecTV tie-up is a no-brainer.

  1. Increased bundling and cross-selling. Famed venture capitalist Mark Andreessen once mentioned that he has a friend who said businesses make money by either "bundling" (packaging together) or "unbundling" products and services. The combined AT&T-DirecTV would be able to bundle numerous products together, offering video, high-speed broadband, and mobile services in one package using all of its current distribution channels (2,300 AT&T retail stores and thousands of dealers nationwide).
  2. Significant cost savings. By year three after closing, AT&T estimates that cost synergies will exceed $1.6 billion annually, mostly due to the combined company being able to scale its video business.
  3. AT&T should get better licensing rates. By combining the 5.7 million AT&T U-Verse Pay TV subscribers with DirecTV's 20 million, AT&T would have leverage to negotiate better rates when it licenses TV programming.
  4. Significant digital distribution boost. AT&T's broadband would cover 70 million customer locations with its broadband expansion, and AT&T would have what it calls "unparalled video content distribution scale in the U.S.," a fancy way of saying that you can stream video almost anywhere you want.
  5. Diversifies the product mix. AT&T becomes a more diversified business as it both raises its revenue from video and diversifies from its core mobile business.
  6. Rural areas get better Internet access. AT&T is making a commitment to both expand in geography and to enhance the quality of its broadband to 15 million customer locations, most of which currently do not have high-speed broadband access. The build-out is expected to be completed within four years after close.
  7. According to AT&T, the merger "significantly expands revenues from outside the US." In particular, DirecTV has strong potential for growth in Latin America, where it is already the leading Pay TV provider with over 18 million subscribers.  In Latin America only 40% of households subscribe to pay TV, and Latin America has a growing middle class. In short, DirecTV is the leading pay TV provider in a strong market with an even stronger demographic tailwind.
  8. Within 12 months AT&T expects to see accretion. The acquisition is forecast to increase adjusted earnings per share and free cash flow per share, despite any dilution that may result from the acquisition.

Are there any risks?
There are risks to the acquisition, namely the approval of the FCC, the Justice Department, and the fact that the merger could be doomed unless the NFL agrees to renew its lucrative NFL Sunday Ticket agreement with DirecTV.

However, from a financial and business standpoint, the deal makes a whole lot of sense.

In all, businesses earn greater revenue by either increasing their number of customers or by increasing the revenue per customer. Thanks to large user bases and an enormous cross-selling opportunity, AT&T gets both.

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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 17, 2014, at 10:01 AM, alta wrote:

    1. AT&T can already bundle TV, internet, and mobile. The only place this will help is out of their foot print, where they can bundle TV and mobile, but still no internet.

    2. Every company in the worlds makes this claim about acquisitions. Doesn't always pan out--hardly a compelling reason for an acquisition.

    3. This is true, but already covered in point 2.

    4. AT&T doesn't need Direct TV to expand broadband coverage. You're correct in saying TV coverage would of course increase.

    5. As a shareholder I can diversify on my own--I don't need the company to do it for me. Finance 101. They could purchase an agriculture company and diversify as well. Doesn't make it a good acquisition.

    6. AT&T is saying this to appease regulators. Direct TV has no impact on this--AT&T could (and probably would) do this without the acquisition.

    7. This could open up opportunities to bundle services outside the US in the future. Fair point.

    8. Again, AT&T could see accretion from an agriculture company within 12 months. Doesn't (in itself) make it a good idea.

    Few of these reasons are compelling, much less justification for this merger. It will be interesting to watch this play out.

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