The Wall Street Journal thinks that Verizon Communications (NYSE: VZ) could be interested in buying satellite TV provider DIRECTV Group (Nasdaq: DTV) soon. In fact, the Journal believes there might be a race to acquire DirecTV between Verizon and archrival AT&T (NYSE: T).
No need to jump the gun, guys. Here's why I think this speculation will come to nothing.
Verizon doesn't need DirecTV
Verizon CEO Ivan Seidenberg does seem interested in making video service the core of his fixed-line business, edging out the current focus on voice communications. And yes, buying DirecTV or DISH Network (Nasdaq: DISH) would give an immediate boost to that business. But the FiOS video service is doing fine on its own.
The FiOS TV service now reaches 10.3 million American households, and the overall FiOS network now reaches 43% of Verizon's service area for wireline voice products. The company is clearly committed to making FiOS available to the majority of its phone-line customers. And a stunning 25% of potential FiOS TV customers are already actual customers -- up from 20% a year ago.
By way of comparison, there are 115 million TV market households in the U.S., according to Nielsen. DirecTV's 18 million American subscribers amount to a 16% adoption rate. Verizon is still building the FiOS network, and the customer attach rate is high and rising. There's no need to take steroids when your workout program already gives you the muscle you wanted.
... and really can't afford it
Besides Verizon's limited need to grow by acquisition right now, DirecTV is gosh-darn expensive. Its $27 billion market cap grows to a $30 billion enterprise value when you take cash and debt into account. And that's without any buyout premium.
Oh, and DirecTV has a fresh, profitable co-marketing deal with AT&T. If Verizon wants to buy DirecTV, there'd be deal-breaking penalties involved. This is a lot of moola, and Verizon already carries about $64 billion of net debt. A stock-swap deal would be possible, but this option would be less attractive to DirecTV investors, and it might not pass the required shareholder vote.
OK, smart guy, what do you suggest?
If Verizon really does want to buy video subscribers, DISH Network would be a far more affordable and less problematic option. But I still don't see the need.
Verizon could put its massive cash flows to far better use inside its traditional telecom world. Sprint Nextel (NYSE: S) is struggling for air, and it runs on technology that's pretty compatible with Verizon's. Or perhaps Verizon could snap up Palm (Nasdaq: PALM) and leverage its WebOS platform across a diverse line of phones. That move would both give Palm's platform the marketing muscle it needs (and give Palm investors a generous premium to boot) and make Verizon the first telecom network provider that also makes its own cell phones. That competitive advantage could be worth a few billion dollars, right?
Feel free to discuss Verizon's options in the comments below, dear Fool.
