AT&T-DirecTV Acquisition: Bigger May Not Be Better (Analysis)
If ever a business deal smacked of desperation, it is AT&T’s plan to acquire DirecTV for $67.1 billion in stock, cash and the acquisition of debt.
At a time when growth in its wireless business is flat, AT&T is buying a company that delivers pay cable channels, another business that is starting to decline.
The trend is toward online distribution of programming, which includes streaming services like Netflix that only require a broadband connection.
DirecTV may be a national video service but it is not going to add any broadband capability to AT&T, which currently only offers high-speed Internet service in about 40 percent of the U.S. (a lot of that is DSL, not the fiber optics cable offers).
The main driving force behind the acquisition seems to be AT&T's belief that bigger is not only better -- it is a necessity. The deal is expected to allow the combined companies to save operating costs. It will also beef up AT&T's cash flow, which is important to investors worried that the telecom may cut its dividend. It could also help AT&T wireless sell more subscriptions by bundling with DirecTV customers, many of whom aren't their currents customers.
But that is what it will do for the company and not what is going to be pitched to the public to win government approvals.
"This… will accelerate innovation and growth," said AT&T CEO Randall Stephenson in a call with analysts Monday. "This transaction will create a very different competitor… that is going to be very good for consumers."
Good for consumers how? It might make DirecTV a stronger competitor, which could be good as a counter to cable. But the overwhelming evidence is that with increased consolidation, prices for consumers are on a one-way trip upward.
"The last six years have been about delivering large amounts of data," Stephenson said, adding: "The next six years will be about delivering video over those networks. That was the key rationale for trying to do something with (DirecTV)."
Does he mean because AT&T will be able to bundle its phone services and broadband with DirecTV's video? That is already widely available and doesn't require an acquisition.
If anything, consumer groups oppose it because it may result in less choice and less competition, which is seen as bad for consumers.
Harold Feld of Public Knowledge, a consumer advocacy group, said on NPR's Morning Edition: "As you get fewer and fewer, bigger and bigger players, there is less pressure on any of them to pass on any of these savings to consumers."
The National Association of Broadcasters, which reps TV networks, said: "It is hard to see how decreasing competitors in the pay TV marketplace – while increasing regulatory restraints on local TV stations – truly benefits consumers."
One innovation Stephenson mentioned is a streaming service. It's not actually an innovation since it would compete with, among others, Netflix and Amazon.
AT&T insists it does have a vision of how DirecTV is going to make it a stronger competitor in a world where Comcast is poised to gobble up Time Warner Cable and Sprint (now owned by deep-pocketed Japanese), which wants to acquire T-Mobile. Stephenson said it will fulfill "a vision we've had for a couple of years -- the ability to take premium content and deliver it across multiple points: your smartphone, tablet, television or laptop."
That doesn't impress analyst Craig Moffett, who after listening to the AT&T conference call said, "if anything you have to be more puzzled now than you were before. They had a chance to articulate a vision and as far as we can tell, there is no vision there." Moffett thinks the only strategy is one of a "process of elimination." By that he means AT&T was stopped from buying T-Mobile in 2011; and wasn't able to do a deal in Europe.
The stock market seems unimpressed. In trading on Monday, DirecTV's stock price fell by nearly three percent to $84.65 a share, well under the projected $95 per share price. AT&T’s stock closed up one percent at $36.38 but then dipped to $36.27 in after hours trading.
So it must be about getting bigger because of the benefits of scale. The deal would join the 5.7 million U-Verse customers with the 20 million DirecTV customers (although AT&T says U-Verse will remain its own business).
It could use its size to negotiate with content providers. However, the trend for companies like CBS and Viacom is to demand big increases based on historic adjustments. That seems to be a more powerful force than their combined buying power if what CBS did to Time Warner Cable is an example.
Some analysts speculated that by moving U-Verse customers from AT&T pipes to DirecTV satellite, it would free up spectrum space. But AT&T said that wasn't true.
AT&T also indicated it is excited about international growth, pointing out DirecTV has about 18 million subscribers in Latin America. However, to get the deal done AT&T is selling its 8.4 percent stake in América Móvil for an estimated $6 billion to avoid regulatory conflicts. It also means the aggressive Mexican company owned by billionaire Carlos Slim will now be a competitor. América Móvil currently has about 22 percent of the Latin market, while DirecTV has about 19 percent. DirecTV still gets a low yield in terms of profits from operations in Brazil, Mexico, Dominican Republic and parts of Central America. The region also still comes with other problems including lots of competitors and political instability in some areas.
There are some other winners and losers. The winner is the National Football League, which has been in discussions with DirecTV since last year about renewing the Sunday Ticket package, which allows subscribers to watch all games each week. The current contract is up at the end of the 2014-2015 season. There is a clause that says if DirecTV can’t renew with the NFL at a reasonable price, AT&T can walk away without penalty. In the Monday conference call DirecTV CEO Mike White insisted nothing has changed, and said the deal will be renewed before the end of 2014. But it seems more likely there were a lot of high fives at NFL HQ in New York because the condition will inevitably increase their negotiating leverage.
Another winner is Warren Buffet, whose Berkshire Hathaway is a big investor in DirecTV and would reap a windfall.
The big loser is Dish Network, which was a candidate to be acquired by AT&T, for its huge cache of spectrum as much as for its video subscribers; and because it has openly said it would welcome a merger with DirecTV. Now both possibilities are off.
Ironically another winner could be Comcast. As the Philadelphia conglomerate seeks approvals to buy TWC, it can now point to AT&T-DirecTV as proof it needs to be bigger to compete, and that its competitors aren’t just other cable providers but all the big media companies.