The Dow Jones Industrial Average (DJINDICES:^DJI) is unchanged as component AT&T (NYSE:T) drops after announcing the purchase of DIRECTV (NYSE:DTV.DL) over the weekend. As of 1:20 p.m. EDT the Dow was basically unchanged at 16,496. The S&P 500 (SNPINDEX:^GSPC) was up a five points to 1,883.
AT&T is down 1.91%, while DIRECTV is down 1.5%, after the announcement of the $48.5 billion deal. DIRECTV shareholders will receive $28.50 per share in cash and $66.50 per share in AT&T stock, bringing the total price to $95 a share. Including assumed debt, the total transaction value is $67.1 billion, or 7.7 times 2014 EBITDA.
AT&T believes the combination of its mobile and broadband businesses with DIRECTVs satellite business will make for a formidable competitor in the video space, especially as consumers' viewing habits change. Management believe they can wring out cost synergies of $1.6 billion per year within three years of the deal's closing. AT&T also noted that DIRECTV is the leading pay-TV provider in Latin America with over 18 million customers, and only 40% of Latin American households currently subscribe to paid TV.
If the deal is allowed to go through, a combined AT&T and DIRECTV would make the second-largest TV company in the U.S. behind the proposed Comcast-Time Warner Cable merger. Regulatory permission is not guaranteed, so AT&T and DIRECTV outlined some regulatory concessions they will make funded by their $1.6 billion in expected synergies:
- AT&T will use the merger synergies to expand its plans to build and enhance high-speed broadband service to 15 million customer locations, mostly in rural areas where AT&T does not provide high-speed broadband service today, utilizing a combination of technologies including fiber to the premises and fixed wireless local loop capabilities. This new commitment, to be completed within four years after close, is on top of the fiber and Project VIP broadband expansion plans AT&T has already announced.
- For customers who only want a broadband service and may choose to consume video through an over-the-top (OTT) service like Netflix or Hulu, the combined company will offer stand-alone wireline broadband service at speeds of at least 6 Mbps (where feasible) in areas where AT&T offers wireline IP broadband service today at guaranteed prices for three years after closing.
- DIRECTV's TV service will continue to be available on a stand-alone basis at nationwide package prices that are the same for all customers, no matter where they live, for at least three years after closing.
- Continued commitment for three years after closing to the FCC's Open Internet protections established in 2010.
AT&T also announced it would sell its remaining 9% stake in Carlos Slim's America Movil to "facilitate the regulatory approval process in Latin America." AT&T has been slowly selling off the stake, which is now worth roughly $6 billion. AT&T also announced that its representatives on America Movil's board would immediately resign "to avoid even the appearance of any conflict."
AT&T also appears to have learned from its T-Mobile disaster: There is no breakup fee if the deal does not get regulatory permission. In 2011, AT&T tried to acquire T-Mobile but was thwarted by regulators. AT&T had to pay T-Mobile $4 billion as a penalty for the deal not going through, funding T-Mobile's disruptive efforts for the next few years.
While AT&T believes this deal makes sense on numerous fronts, large buyouts have a history of underperforming management teams' rosy expectations. It's far more difficult than people think to combine companies and cultures. If I were an AT&T shareholder, I'd be nervous.
Dan Dzombak can be found on Twitter @DanDzombak or on his Facebook page, DanDzombak. He has no position in any stocks mentioned. The Motley Fool recommends DirecTV. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.