US telecoms giant AT&T has struck a deal to buy satellite broadcaster DirecTV for US$48.5bn in a stock-and-cash transaction that values DirecTV’s shares at US$95 apiece.
The deal significantly boosts AT&T’s pay-TV subscriber base in the US, taking…
US telecoms giant AT&T has struck a deal to buy satellite broadcaster DirecTV for US$48.5bn in a stock-and-cash transaction that values DirecTV’s shares at US$95 apiece.
The deal significantly boosts AT&T’s pay-TV subscriber base in the US, taking it from a base of five million to 26 million, and gives it a business in Latin America with the potential to grow.
The US$95 offer represents a premium of 22.4% on DirecTV’s share price at the end of April, prior to when the first reports emerged of a deal being in the works.
DirecTV’s investors will receive US$28.50 in cash and US$66.50 in AT&T stock per share, with the stock portion subject to a collar agreement.
AT&T will finance the cash portion of the deal by utilising cash on hand, performing opportunistic debt market transactions, selling non-core assets, and through committed financing facilities.
The fixed value collar for the stock component lies between US$34.90 and US$38.58. Providing AT&T’s share price stays in this range, DirecTV shareholders will receive between 1.905 shares and 1.724 shares for each of their DirecTV shares, which will amount to US$66.50.
However, if AT&T’s shares drop below US$34.90, DirecTV investors would then only receive 1.905 AT&T shares for their DirecTV shares. AT&T’s stock is currently trading at around US$36.74. After closing, DirecTV’s shareholders will own between 14.5% and 15.8% of AT&T.
AT&T will take on DirecTV’s net debt, which creates a total transaction value of US$67.1bn. According to AT&T, this implies an adjusted enterprise value multiple of 7.7x DirecTV’s 2014 estimated EBITDA.
AT&T expects to achieve more than US$1.6bn in cost synergies by the third year after closing, and said the deal will be accretive in 12 months on a free cash flow per share and adjusted EPS basis.
Goldman Sachs and BofA Merrill Lynch acted as financial advisers to DirecTV, and Weil, Gotshal & Manges, Jones Day and Wiltshire & Grannis served as legal counsel.
AT&T was advised by Lazard but has a large internal M&A team which was reported to have taken the lead on the transaction.
Companies quick to offer concessions
At present, DirecTV has 20.3 million pay-TV subscribers in the US, while AT&T has 5.7 million through its U-verse service. Combining them would create a dominant force in the North American broadcast market.
In order to assuage any antitrust concerns the Federal Communications Commission may have, AT&T has outlined a number of voluntary concessions that it hopes will help secure approval for the deal.
Indeed, the company’s CEO Randall Stephenson stated in a post-merger conference call that gaining regulatory approval was one of the first things the two parties had discussed.
He said: “We had to evaluate the achievability in the regulatory environment. We identified the big things. We tried to be proactive and anticipate where the sensitivities would be.”
Among the concessions that have been offered is a commitment to maintain DirecTV’s nationwide pricing policy for three years. AT&T will also comply with the FCC’s current net neutrality policy for the next three years.
The telco added that it would participate in the regulator’s upcoming spectrum auctions and would bid at least US$9bn in the 2015 incentive auction of 600 MHz frequencies.
Gaining regulatory approval, though, could take some time. Wells Fargo analyst Marci Ryvicker warned that the fact there were now multiple deals in front of the government could slow down the regulatory process.
DirecTV itself said that the likely protracted regulatory process will hold the companies back from closing the transaction for a year.
The deal will need the approval of the FCC, the Department of Justice, a small number of US states, and the Latin American countries DirecTV operates in.
AT&T to exit America Movil
To achieve regulatory approval across Central and South America, AT&T will dispose of its US$6bn stake in Carlos Slim’s telecoms giant America Movil (AMX), which competes with DirecTV for pay-TV customers in a number of countries.
AT&T’s representatives on AMX’s board will tender their resignations immediately to avoid even the appearance of any conflict. Currently two AT&T employees sit on AMX’s board, as does a former AT&T executive.
The stake sale will end a long-term relationship between the two companies which dates back to when Stephenson worked in Mexico with Slim in the nineties.
DirecTV Latin America boasts more than 18 million subscribers. It has operations across Argentina, the Caribbean, Chile, Colombia, Ecuador, Peru, Puerto Rico, Uruguay and Venezuela under its own brand, and in Brazil, through Sky Brasil – where it holds a majority stake – and Mexico. DirecTV holds a 41.3% stake in Sky Mexico, although the unit is majority-owned by Grupo Televisa.
AT&T said the broad reach of DirecTV’s satellite platform in Latin America “remains advantaged when compared with cable and telco in Latin America”.
Latin America has an under-penetrated pay-TV market as only 40% of households subscribe to pay-TV. There is a growing middle class in the region and it is DirecTV’s fastest growing customer segment.
Transformative deals reshape sector
The US$48.5bn merger comes just over a year after America’s two largest cable companies, Comcast and Time Warner Cable (TWC), agreed to a US$45.2bn merger. That transaction would create an operator with more than 30 million subscribers, although it still requires regulatory approval.
Stephenson previously admitted that the Comcast/TWC tie-up had refocused his company’s attention on the US market, when it had been exploring potentials deals in Europe.
And AT&T faces further threats. The CEO of Japanese telecoms operator Softbank, Masayoshi Son, is reportedly keen on merging Sprint Corp, which it bought for more than US$20bn in mid-2013, with its smaller rival T-Mobile US to create a similar-sized mobile operator to AT&T and Verizon Wireless.
Dish to ride wave of consolidation?
DirecTV’s main rival in the US, Dish Network, has also been talked about as both a target and acquirer.
Credit Suisse analyst Joseph Mastrogiovanni suggested in a note that the deal could be a catalyst for more consolidation.
“We’d be surprised to see Dish sit on the sidelines for long,” said Mastrogiovanni.
He added: “Verizon has shown a willingness to respond to AT&T’s strategic initiatives.”
New Street Research analyst Jonathan Chaplin was sceptical of the strategic benefits of the deal to AT&T and wondered why it did not pursue a takeover of Dish instead. He argued that the part of AT&T’s business most under threat was its mobile division, and the transaction did “little if anything” for that element of the business. Whereas a Dish merger, Chaplin suggested, would have bought AT&T significant spectrum assets.
Wells Fargo analyst Jennifer Fritzsche said the deal did not really take out a competitor, but the resultant size of AT&T/DirecTV emphasised the lack of scale its smaller mobile rivals Sprint and T-Mobile had.
“In this changing world […] OTT (over the top), content relationships and wireless scales are hugely important,” she said.
Fritzsche added that AT&T likely discounted a Dish takeover as it “would have sounded more regulatory alarms” than the DirecTV tie-up.
While Ryvicker would not rule out a merger between Dish and Verizon, she felt Dish would prefer to do a deal with Sprint.
“We have believed this whole time that [Dish chairman Charlie Ergen’s] preference has been to partner with Sprint,” she wrote, citing the vision Ergen articulated earlier this year to provide video, data and voice services in and outside the home.
