It's been six months since AT&T (NYSE:T) agreed to buy DirecTV (NYSE:DTV.DL) for $48.5 billion in cash and stock. Investors could be looking at another six months before the deal closes, so we're effectively at the halfway mark in the acquisition.
Combined, DirecTV and AT&T have more than 26 million video subscribers in the United States. That's more than Comcast's (NASDAQ:CMCSA) 22.5 million, but could still be dwarfed if the cable giant's merger with Time Warner Cable receives approval from the FCC. Both mergers are currently under review because their combined operations will have a significant impact on the U.S. pay-TV market of approximately 100 million households.
Here's what investors need to know about the current state of AT&T's merger with DirecTV.
AT&T's stock price affects the purchase price
In the terms of the merger agreement, AT&T will use both cash and stock to compensate DirecTV shareholders. The proposed buyout is for $95 per share, but about $66.50 will come in stock.
For each of their DirecTV shares, shareholders will receive 1.905 shares of AT&T stock if AT&T's stock price is below $34.90 at closing and 1.724 AT&T shares if AT&T's stock price is above $38.58 at closing. If AT&T's stock price at closing is between $34.90 and $38.58, DIRECTV shareholders will receive a number of shares between 1.724 and 1.905 equal to $66.50 in value.
Right now, AT&T's stock is trading right around the low price of that band, $34.90. If the stock price stays below $34.90, DirecTV shareholders at closing would receive compensation worth less than the $95 ticket price.
The FCC paused the review clock at day 76
The companies with the most at stake if AT&T's merger with DirecTV and Comcast's merger with Time Warner Cable go through are the media companies that sell their content to pay-TV operators. Fewer buyers means less leverage.
The media companies, therefore, aren't as cooperative with the FCC's requests as the operators might want them to be. When asked to provide carriage contracts with the cable and satellite providers, the media companies provided arguments that those contracts ought to have limited visibility. This prompted the FCC to pause its review while it works on gathering information.
Neither AT&T nor DirecTV is concerned about the suspended review clock. DirecTV expects the review process to resume this week, and AT&T says it still expects to close the deal in the first half of 2015. Both note that the FCC's stopping the clock on merger reviews is fairly common.
Almost everything else is in place for approval
DirecTV passed two major hurdles last quarter in the approval process. First, its shareholders approved the merger with 99% of voters in favor of the transaction. Second, DirecTV renewed its agreement with the NFL to carry its Sunday Ticket package.
According to the terms of the agreement, AT&T could have chosen "not to consummate the merger" if DirecTV didn't renew the rights to Sunday Ticket. The NFL might have used that fact to its advantage when it negotiated a 50% increase in the price for the rights to the all-inclusive football buffet. It's worth noting that price increase is in line with the NFL's other broadcasting agreements over the last few years.
Meanwhile, AT&T's purchase of DirecTV's large Latin American operations have already been approved throughout South America. AT&T's sales of its 8.3% stake in America Movil certainly helped speed up the process, and gave it some extra cash for the acquisition.The only country outside of the United States that has yet to approve the merger is Mexico.
We're No. 2
DirecTV is the second largest pay-TV operator in the U.S. and AT&T is the second largest broadband Internet provider, both trailing Comcast. Combining forces will allow AT&T to bundle broadband services with all of DirecTV's subscribers while gaining leverage over media companies with the combined 26 million pay-TV subscribers.
Halfway through the acquisition process, everything is looking fine. AT&T's stock price is staying close to its merger band, and institutional investors will likely give it a nudge into the band if it's still outside (but close) after the merger gains approval. For now, all AT&T and DirecTV can do is comply with everything the FCC asks of them, and wait for its approval.