AT&T buys DirecTV for nearly $50 billion

AT&T buys DirecTV for nearly $50 billion

AT&T buys DirecTV for nearly $50 billion

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by ROGER YU / USA Today

KREM.com

Posted on May 19, 2014 at 6:42 AM

AT&T agreed Sunday to buy DirecTV for nearly $50 billion in yet another mammoth deal in the pay-TV space this year that would immediately boost the telecom giant's customer base at a time of confounding industry challenges.

The merger, which both boards approved Sunday, is the latest evidence of TV-industry consolidation that underscores telecommunications companies' desire to amass customers and control content and delivery. With streaming and wireless technology upending the industry, cable and satellite service providers are rushing to add product options while boosting revenue per customer to please shareholders.

"This deal is about getting more money from the same customers," says Roger Entner, analyst at Recon Analytics. "We are running out of people who want to buy wireless service."

In the deal, AT&T would pay DirecTV shareholders $95 per share, valuing the satellite-TV service provider at about $50 billion. In anticipation of the deal -- their talks were first leaked in late April -- DirecTV shares have risen 12%.

AT&T offers pay-TV service through its U-Verse brand, but its market reach is limited. The acquisition broadens AT&T's footprint nationally and creates a pay-TV giant that can offer video through both fiber-optics lines and satellites. It would also give AT&T more flexibility in bundling services, including its wireless data contracts and DirecTV's satellite-delivered Internet service.

If approved by regulators, DirecTV will operate as AT&T's subsidiary. It was previously announced that Michael White, DirecTV's chairman and CEO, will retire in 2015.

AT&T U-Verse's TV service has about 5.7 million customers in 22 states. DirecTV, with about 20 million customers nationwide, is the second-largest pay-TV provider -- behind Comcast -- and the largest satellite TV company in the U.S. DirecTV also has 18 million customers in Latin America and offers AT&T an immediate access to that fast-growing market.

Their negotiation follows a deal struck earlier this year by Comcast to buy Time Warner Cable for about $45 billion, a transaction that would merge the nation's two largest cable companies.

With consumer groups loudly opposing media industry consolidation, AT&T and DirecTV could face regulatory roadblocks. AT&T's acquisition of DirecTV eliminates a competitor in AT&T U-Verse's markets.

Need to grow sales-per-customer

The deal boosts AT&T's customer total, but its desire to grow revenue per customer -- a key industry metric -- also may have pushed the company's management to move quickly.

By folding satellite-TV service into its broad telecom portfolio -- wireless, phone and fiber-optic broadband and TV -- AT&T will be in an ideal position to create varied bundled packages to sell more options. It can up wireless contracts with land-line broadband Internet and package them with TV programming and other ancillary services, such as home security.

For customers in its non-U-Verse markets, it can offer its existing services along with satellite TV. Eventually, the company may also introduce data-and-TV packages delivered on its wireless networks if it can work out lower pricing levels and address issues surrounding monthly cap limits.

Currently, AT&T customers who have U-verse triple-play service, which includes land-line phone, broadband Internet and cable TV, spend about $170 each month (not including wireless service). With its satellite TV revenue alone, DirecTV generated $102.18 per user in 2013, up 5.4% from 2012.

On the content front, a combined company would also have more bargaining leverage in talks with content providers for retransmission and licensing fees. "You hope you can squeeze out some, if not lower rates, some slower-growing rates," says SNL Kagan analyst Ian Olgeirson.

Another possible result: a stronger TV everywhere package -- combining wireless, satellite and fiber-optic networks -- could emerge from the merger, a plus for DirecTV. Its satellite TV competitor Dish Network acquired wireless spectrum that could eventually be used for broadcast.

Their deal removes yet another competitor in the Internet market and will surely trigger howls of protest from so-called "net neutrality" proponents who are concerned about the powers of Internet service providers (ISP) in dictating what flows thorough their pipes.

It's widely known that DirecTV's satellite-delivered Internet is slow compared to cable companies, but it still has millions of customers. The increased concentration of power in the ISP business could give AT&T more leverage if -- as the Federal Communications Commission has preliminarily proposed -- ISPs are ultimately allowed to charge for "fast lanes" of the Internet for content providers that are willing to pay for them.

Though the size of the deal is comparable to the $45 billion Comcast-Time Warner Cable deal, the competitive issues surrounding the two mergers are different in several ways. Comcast struck a deal to buy another provider of pay-TV and Internet service in Time Warner Cable, but the transaction would not eliminate a competitor in their markets.

"(The AT&T-DirecTV deal) will be looked at somewhat differently," Wait says. "This is not Comcast-Time Warner Cable round two."

AT&T's acquisition of DirecTV would remove a competitor in the U-Verse markets since the satellite-TV service would be owned and marketed by AT&T.

"The horizontal overlap is important," says Amanda Wait, an attorney at Hunton & Williams and a former antitrust attorney at the Federal Trade Commission. Regulators "want to figure out if they are competing for same customers."

Comcast's ownership of a major content creator, NBC Universal, also triggers questions about its bargaining leverage against other pay-TV companies. Neither AT&T nor DirecTV owns a content subsidiary.

Contributing: USA TODAY's Mike Snider

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