3 Ways AT&T's DIRECTV Buyout Might Fail

Sources: AT&T and DirecTV.

AT&T (NYSE: T  ) is moving closer to taking ownership of DIRECTV (NASDAQ: DTV  ) . The pending $67 billion merger has reportedly received a green light from the Department of Justice. The companies still need to convince the FCC of the deal's merits, and then get approval from DirecTV's shareholders before crossing the final T.

The shareholder vote is scheduled for September 25. The company's board of directors unanimously recommends voting in favor or the merger, and more than half of all outstanding shares must be voted in favor before the agreement can be consummated.

But before sending in that proxy card, investors are encouraged to consider the proxy statement's comprehensive list of risk factors. These are many and varied, and they're broken down into three different categories:

  • Risks affecting AT&T after the merger
  • Risks regarding DirecTV after the merger
  • Risks related to the merger itself

Some of these risk factors may indeed trip up the entire process. Let's take a look at five of the biggest roadblocks in front of AT&T's DirecTV buyout.

Value of AT&T shares
The writers of this proxy statement, which included the legal departments of both AT&T and DirecTV, took a long, hard look at how the deal might affect share prices. It's not just one risk factor; the top three risks all deal with share price movements before and after the merger's closing, and there's a fourth warning tacked on at the very end of the merger-related risk statements.

The very first, and arguably the most dire, risk involves AT&T stock falling before the deal is completed. The total cash and stock compensation per DirecTV share should add up to roughly $94.50 per share, with variable stock-for-stock exchange ratios based on AT&T's share prices. If AT&T shares fall too far before that crucial vote, DirecTV investors would start worrying about the value they're getting -- or lack thereof.

So far, AT&T's stock has actually gained about 5% since the deal was announced. So far, so good... but you never know when Mr. Market might throw AT&T a curveball.

Investors are also reminded that AT&T's stock will continue to fluctuate, with or without DirecTV under its vest. And the dilutive effect of printing about 900 million new AT&T shares to finance this buyout could weigh on the combined company's share prices, as well. And finally, the merger may not grow -- or even shrink -- the earnings of the new AT&T company. If so, share prices could fall again.

Meeting conditions of the merger
The companies expect to face plenty of challenges to their union. These include the regulatory and shareholder approvals already discussed... but there's more.

The deal must be approved as a tax-free "reorganization" under IRC's Section 368. Probably not a big concern, assuming that the companies did their tax-related homework, but a misstep would add billions of tax dollars to AT&T's final costs.

DirecTV is currently renegotiating its Sunday Ticket agreement with the National Football League. If that deal falls through, or is completed under radically different terms than the current contract, AT&T might reconsider this merger.

Moreover, the regulatory approvals from the FCC and DoJ might come with substantial conditions of their own. No such terms have been disclosed yet, but they could make a serious difference to the deal's final value to DirecTV shareholders. These things happen, you know.

Insider interests may be different from shareholder interests

DirecTV chairman, CEO, and president Michael White. Source: DirecTV.

DirecTV insiders and 5% owners currently hold about 7% of the company's shares. That's usually enough to align the interests of management with those of other owners; but there are asterisks all over DirecTV's situation.

You see, the largest inside shareholder is DirecTV's CEO, chairman, and president, Michael White. But White only owns about 350,000 shares in his own company. That's less than 0.1% of DirecTV's 500 million shares outstanding.

He also holds the rights to another 520,000 deferred stock units; but even so, Michael White is hardly a huge DirecTV owner. In 2013, White received less than half of his $12.5 million total compensation in the form of shares or options. And it gets even more interesting.

Michael White's contract comes with a $22 million golden parachute benefit. That's nearly two years of his current compensation for running DirecTV, bonuses and all.

Now, the golden parachute will not be triggered by a simple change in control. It's a so-called double trigger clause, which takes effect if DirecTV is acquired and White's employment is terminated. AT&T has not stated what role White will have in the new company, if any, so the buyout bonus may or may not happen.

I think it's fair to say that DirecTV's insiders aren't as aligned with regular shareholders as that 7% major-owner stake might imply. And White, who not only runs DirecTV's day-to-day operations, but also acts as strategy-minded captain of the boardroom, just might have a few million reasons to accept AT&T's buyout offer -- even if it isn't necessarily the best thing for shareholders. And the worst part of this is, there's no way to know until the companies say what would happen to Michael White after the merger.

So, yes, it's quite possible that DirecTV's board and management have different goals and hopes for this buyout than regular shareholders do. Closing the deal may, in fact, be more important to White and other insiders than reaching a fair and equitable agreement. The incentives just don't seem to line up correctly.

These merger risks are the real McCoy
There are other large challenges, too. The expected synergies from this merger might never materialize, putting a huge crimp in the long-term value of combining these companies. And many of DirecTV's biggest shareholders would lose their influence over the business, given that DirecTV owners will own just 15% of the merged company. Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , for example, owns 4.7% of DirecTV, but holds no stake in AT&T at all. Will Warren Buffett be happy with a minuscule 0.7% investment in AT&T?

The risks detailed above are the biggest challenges that might stop the DirecTV/AT&T merger. Some of these warnings can trip the deal up in regulatory proceedings, and others might inspire large shareholders to withhold their approval. Both types of risk could stop AT&T's second multi-billion dollar merger attempt in three years.

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