AT&T (NYSE:T), one of the largest US carriers in the United States, yesterday finally announced the acquisition of DirecTV, Inc. (DTV), the leading U.S. satellite television provider, in a landmark $48.5 billion deal that will help transform the broadcast industry as we know it. On May 18, 2014 AT&T announced that AT&T will acquire DirectTV for $95 per share. AT&T also laid out the deal terms which include a combination of cash and stock:
DALLAS, TEXAS and EL SEGUNDO, CALIF. - May 18, 2014 - AT&T and DIRECTV today announced that they have entered into a definitive agreement under which AT&T will acquire DIRECTV in a stock-and-cash transaction for $95 per share based on AT&T's Friday closing price. The agreement has been approved unanimously by the Boards of Directors of both companies.
Summary Terms of Transaction
DIRECTV shareholders will receive $95.00 per share under the terms of the merger, comprised of $28.50 per share in cash and $66.50 per share in AT&T stock. The stock portion will be subject to a collar such that DIRECTV shareholders will receive 1.905 AT&T shares if AT&T stock price is below $34.90 at closing and 1.724 AT&T shares if AT&T stock price is above $38.58 at closing. If AT&T 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.
This purchase price implies a total equity value of $48.5 billion and a total transaction value of $67.1 billion, including DIRECTV's net debt. This transaction implies an adjusted enterprise value multiple of 7.7 times DIRECTV's 2014 estimated EBITDA. Post-transaction, DIRECTV shareholders will own between 14.5% and 15.8% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding today.
AT&T intends to finance the cash portion of the transaction through a combination of cash on hand, sale of non-core assets, committed financing facilities and opportunistic debt market transactions.
In order to ensure regulatory approval, AT&T is also set to divest its 8% stake in América Móvil.
As usual in the mergers and acquisitions business, shares of DirecTV have been soaring lately and it is likely that DTV shares will open at around $95 in today's trading session -- the deal price.
(Source: Yahoo Finance)
Why the DirecTV acquisition is a good deal for shareholders
The transaction will lead to an integrated communications company with serious broadband reach (approximately 70 million customer locations) and access to a broad pool of video content. In addition, the deal will address one of the biggest challenges in today's communications industry: To deliver premium content from one content provider to multiple screens (Mobile phones, tablets, desktop PCs). Also, AT&T's network reach makes it the most suitable partner for a premier content distribution business.
Most importantly, AT&T's DirecTV acquisition pretty much highlights a trend that many commentators already pointed their fingers to when the Comcast (NASDAQ:CMCSA) and Time Warner Cable (TWC) deal was announced (which currently faces regulatory scrutiny): Industry consolidation, that will benefit communications companies with scale and depth. AT&T delivers the scale, DirecTV delivers the depth. In addition, AT&T expects the DirectTV acquisition to be solidly accretive. In particular, AT&T expects:
- Cost synergies of more than $1.6 billion annually three years after transaction closing
- Positive free cash flow and adjusted EPS effects within one year after closing.
Cost synergies and higher revenues from video content distribution will surely have a positive free cash flow impact, which, in turn, should translate into tailwinds for AT&T's prospective dividends. While I think AT&T will be cautious in the beginning and will wait with dividend increases until DirecTV has been integrated, increases in shareholder remuneration as a consequence of the deal are a very real possibility.
Another point worth mentioning, is that the consolidation in the communications industry is in full swing. The AT&T/DirecTV deal should provide tailwinds for the regulatory approval process of the Comcast/Time Warner Cable deal as it sends a strong message to regulators that the sector indeed consolidates toward larger entities.
I have already had an optimistic outlook on AT&T despite the recent surge in AT&T's share price and with no consideration of AT&T creating the second biggest pay TV enterprise. Should the deal go through, which I think it will, AT&T could experience a significant boost to its free cash flow in the near term and, ultimately, its dividend. I think most investors in AT&T are income investors who want to benefit from the 5% annual yield that the stock offers. With increasing consolidation and an expansion of its broadband network, AT&T will have a strong grip on mobile and video networks that should translate into higher free cash flows and dividends for shareholders down the road. Long-term BUY.