Why You Should Buy DirecTV

| About: AT&T Inc. (T)


DirecTV’s stock has been increasing since news relating to an acquisition by AT&T started flowing in around the end of April 2014.

AT&T confirmed on May 18th, 2014 that it has reached an agreement with DirecTV to buy DirecTV for $95 per share and also assume DirecTV’s $18.6 billion net debt.

The acquisition deal presents upside for DirecTV shareholders but offers a mix of negatives and positives for AT&T.

The acquisition of DirecTV (DTV) by AT&T (NYSE:T) presents a mouth-watering upside to DirecTV shareholders. However, when the transaction goes through, DirecTV shareholders will be replaced by cash and AT&T shares in investors' accounts. In this article, I will explain why converting to and keeping the AT&T shares may not be a profitable idea in the short run.

Stock Price Performance

There has been a lot of speculation about AT&T's interest in buying DirecTV since the last week of April 2014. The news has clearly favored DirecTV's stock as it gained more than 13% increasing from less than $76 to more than $86 since April 25th, 2014.

Source: Google Finance

The Deal

AT&T announced on May 18th, 2014 that it has reached an acquisition agreement with America's largest satellite television provider, DirecTV, for $95 per share. DirecTV shareholders will receive $28.50 per share in cash and an additional $66.50 in the form of AT&T shares if AT&T shares trade between the expected $34.90 and $38.58 range. The swap ratio for DirecTV-AT&T shares has been capped at 1.905, if AT&T's stock falls below the expected range, and floored at 1.724 if AT&T's share price tops this range. As of May 19th, 2014 AT&T share trades at around $36.47. Regulators had rejected AT&T's attempt to acquire T-Mobile in 2011 causing AT&T to pay T-Mobile a break-up fee of $6 billion. This time, however, the agreement includes paying no break-up charges if regulators reject the proposal.

Reasons Why the Deal Should Go Through

While the merger has been agreed by DirecTV it awaits approval from the Federal Communication Commission and the US Department of Justice. I believe that AT&T has timed this announcement really well because the approval authorities are already evaluating the merger between the number one and number two cable providers in the US, Comcast (NASDAQ:CMCSA) and Time Warner Cable (TWC). This increases the chances of the DirecTV acquisition getting approval because if the Comcast-Time Warner merger is approved, there would be little justification to reject the AT&T-DirecTV union. Another argument in favor of AT&T is the fact that DirecTV is not a direct competitor because DirecTV deals mostly in satellite television while AT&T operates mainly in telecommunication and broadband networks.

The Merger is Full of Value for DirecTV Shareholders

While for the acquirer, merger is mostly a potential benefit that may or may not materialize in the future the target company mostly benefits from being acquired. This is because the buyer has to pay up enough premium to convince the target company to agree to be purchased. In the case of DirecTV, the acquisition is priced at $95 per share for DirecTV investors compared to the share's current price of around $86 and offers more than 10% upside. In my opinion, the stock is sure to unfold this upside if the deal closes out when expected this summer.

The other important aspect this transaction holds for DirecTV shareholders is exposure to AT&T. Investors are expected to receive between 1.724 and 1.905 shares of AT&T compared to each DirecTV share. While the upside for DirecTV shares is obvious, AT&T has both positives and negatives from this transaction. The negatives are that AT&T will assume $18.6 billion of net debt from DirecTV, burdening AT&T's balance sheet; AT&T's EPS will be diluted due to increased shares outstanding and it may take some time, possibly twelve and thirty-six months, for AT&T to work out full synergies with DirecTV. The positives include access to Latin American markets with significant growth potential; an increased customer-base including 20 million DirecTV subscribers in the US and 18 million in Latin America; the potential ability to offer video content on multiple screens including TV, mobile and laptop; improved size and strength to compete against Comcast-Time Warner in the television and broadband markets, robust cashflows of around $8 billion annually from DirecTV, and a more diversified revenue mix.


DirecTV acquisition by AT&T weighs nicely on DirecTV's stock and the stock has been climbing continuously since news relating to the deal started pouring in. The offer price of $95 presents further upside despite the recent rally and the stock is expected to be trading around $95 when the deal is carried out. So, right now with at least 10% upside, DirecTV's stock is a 90 cent dollar.

However, after the transaction investors will have a mix of cash and AT&T shares. Despite the fact that long-term prospects are bright for AT&T, its stock price is expected to suffer from dilution and it may take AT&T more than one year before synergies from the acquisition start working out. Therefore, I would recommend buying DirecTV and selling above $94 rather than taking exposure to AT&T when the transaction completes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.