AT&T Purchase of DirecTV Sign of the Times

By Peter Bernstein May 19, 2014

It took a little haggling over the valuation, but this weekend’s announcement that AT&T has finally sealed the deal to buy U.S. satellite company DirecTV for $48.5 billion should not come as much of a shock. As all of us look to use our smart devices more and more to consume video this is recognition of the need for traditional carriers to build out ecosystems where customers never leave their “E”vironments. Think of this as multi-screen manifest destiny.

The real question is whether the price tag for a little more than 20 million subscribers is worth it. The answer will take some time, but there is reason to suggest that the valuation might be justified given the obvious convergence of wireless, wired and TV to accommodate rapidly evolving consumption behavior.

A good deal and a good deal more?

The basics of the deal have been widely reported.  AT&T is offering $95 per DirecTV share in a combination of stock and cash, a 10 percent premium over Friday's closing price of $86.18. It will finance the cash portion, $28.50 per share, with funds on hand, asset sales and financing already lined up.

The transaction has a total value of $67.1 billion, including the assumption of DirecTV's net debt. Plus, as a means to ease regulatory concerns AT&T will sell its roughly 8 percent stake in Carlos Slim's America Movil, worth roughly $5 billion. DirecTV has some 18 million customers throughout Latin America.

As noted, for AT&T whose wireless business is mature and is facing slowing growth, and whose fixed-line broadband service U-Verse needs augmentation in terms of expanding the footprint of content that can be offered to a broader audience to fend off competitive in-roads from cable companies, other wireless companies and OTTs, the logic of the transaction makes sense. As AT&T CEO Randall Stephenson stated in a conference call,"It gives us the parts to fulfill a vision we have had for a couple of years, that is, the opportunity and the ability to take premium content and deliver premium content over multiple points for the customer, whether it be through a smartphone, through a tablet, or television or laptop."

For DirecTV, the deal will allow it to offer broadband Internet for the first time to its U.S. customers, a gaping hole in its offerings that over time would marginalize its competitive posture. In short, both parties to the transaction, understood the need to get to a full portfolio of quadruple play capabilities with a sense of urgency, and on this basis they have shored up their defenses while also giving them fresh ammunition to take market share.

While many have speculated that the move comes as a reaction to the recent $45 billion proposed Comcast acquisition of Time Warner Cable, which certainly was an influence in the timing here, the reality is that for strategic reasons AT&T would likely have had to consider such a move on DirecTV or its major satellite contender in the U.S., Dish Networks, as the industry faces the need to offer one-stop shopping for “E”verything. Indeed, the latest estimates that Netflix now accounts for roughly 30 percent of all Internet bandwidth consumed is a marker as to why those who wish to be dominant players going forward need to be able to offer multiple media content delivery anywhere, any time, all the time to any type of device.  I have characterized this previously as the new era of all ways.always.com. 

As expected, the howls of protest about the transaction were immediate and rather predictable. Competitors raised questions about the specter of the creation of such a behemoth would have on the marketplace and the possible chilling impact on services innovation. This includes concerns about places where AT&T’s U-Verse competes against DirecTV. Consumer groups were alarmed that the deal just meant that industry concentration would ultimately mean higher prices and fewer choices.

The validity of such arguments will be the gist of regulatory review in the coming months. Let’s just say as a result of this proposed deal and the pending Comcast/TWC one, regulators have a lot to consider in regards to how far they wish to use antitrust considerations in dictating the structure of an industry in the throes of almost unprecedented change. 

There is even a net neutrality angle to consider. As more and more desired premium content ends up being streamed video, think of the popular series House of Cards that is a Netflix offering as a good example, being able to offer it as a quality experience to customers in a manner where they are not constrained by the type of network they are using for access. While there are certainly technology integration challenges to be overcome in terms of offering a seamless user experience and all of the back office issues that would result, it is a path that is tempting to take given the in-roads of the OTTs and slowing subscription rates for television services now being faced by fixed network operators and satellite companies alike. 

We are moving rapidly to a multi-screen world where as consumers all we care about is that we can watch what we want, when we want it, on what we wish to view it, and we will not care how it is delivered. We just want choices, ease-of-use and pricing models that fit within our zones of reasonableness.

Back at the start of this year I predicted that it would be the year of industry restructuring. It is only the middle of May and here in the U.S. the platter of deals is already full.  With T-Mobile and Dish still out there things are only going to get more exciting. Hang on to your hats. 




Edited by Maurice Nagle
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