Telecom giant AT&T (NYSE:T) made it official on Sunday that it was buying DirecTV (DTV) for $48.5 billion, which values DirecTV at about $95 per share. The deal, which will be financed in stock and cash is AT&T's entry route into the realm of mobile and online video streaming.
Several weeks ago, I offered a scenario where AT&T would trade at $40. But when rumors of this deal was first announced, I called it a short based on several factors, including the fact that AT&T does not have a strong track record of extracting value from acquisitions. Its $4 billion deal last year for Leap Wireless is the most recent example. As it stands, shares of AT&T are down 7% since it bought Leap.
For DirecTV, AT&T is paying a 40% premium for a company that is dealing with slowing subscriber growth. And when you factor in DirecTV's debt load of $16 billion, this shoots the total enterprise value to a $66 billion deal. AT&T's management has yet to explain how DirecTV, which has no internet infrastructure, can help AT&T grow its internet ambitions. No to mention, this deal ties up AT&T's capital, which will inhibit their ability to maneuver in future wireless auctions.
Granted, there are some cost benefits in this deal that makes sense. From a cash flow perspective, this deal will help AT&T further its dividend, while also giving the company some leeway to take on Comcast (NASDAQ:CMCSA), which just picked off rival Time Warner Cable (NYSE:TWX) for $45 billion. But beyond that, what are the advantages? On a conference call with journalists Sunday, Randall Stephenson, AT&T's Chairman and CEO explained it this way:
"What it does is it gives us the pieces to 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."
Even if we were to agree that the combined entity, which will total 26 million U.S. subscribers, can be a worthwhile threat to Comcast, this still doesn't solve the AT&T's immediate needs in the realm of video streaming. Nor does it resolve DirecTV slowing growth rate of subscribers.
AT&T's smartphone business, which makes up over 90% of the company's phone sales, is still doing well. When compared to Verizon's (NYSE:VZ) 103 million customers, AT&T is by far the U.S. leader with 116 million mobile customers. In the recent quarter, AT&T's wireless-segment posted decent growth and wireless-data sales soared by 17%. And the company added more than 2 million new subscribers to its wireless and high-speed broadband service.
So I don't see why management believes now is the time to shift focus. Is the $1.6 billion that the combined companies hope to save annually worth it? The greater issue is AT&T's lack of internet service capabilities. This is where it won't be able to compete with Comcast.
It's a great deal for DirecTV and its shareholders. And customers are certain to enjoy the benefits of bundling and the added convenience of having their internet service, pay TV and mobile phone arrive on a single bill. But unless this is part of a bigger plan, which involves more M&A pieces, I still don't see the rationale behind the acquisition.
It remains to be seen if this deal receives regulatory approval. Given its timing, it's possible that AT&T is betting on less regulatory scrutiny, giving that Comcast's deal for Time Warner Cable fall along similar lines. In a bit of irony, but deals may be looked upon as a "bundled package" and therefore either they are both approved or denied.
In any case, this deal is far from a slam-dunk. But it's not harder than a lay-up. With AT&T stock trading at around $36 per share, investors should hope that federal regulators protect the company from itself by blocking this deal. With AT&T stock trading down this mooring at 1.42%, the Street seems tuned-out.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.