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…
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, and the stock portion will be 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 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.
Claims public interest benefits
Synergies created by the merger will allow AT&T to expand its broadband network to 15 million customer locations over the next four years, primarily in rural areas. AT&T has also committed to maintain DirecTV’s nationwide pricing policy for three years and comply with the Federal Communications Commission’s (FCC) existing net neutrality policy for three years, in what can be seen as concessions to the regulator.
AT&T added that the deal will not impact on its participation in upcoming spectrum auctions and that in planned to bid at least US$9bn in the 2015 incentive auction of 600 MHz providing there a viable path to obtaining a 2x 10 MHz nationwide footprint.
The deal follows Comcast’s merger with Time Warner Cable (TWC) which unites America’s two largest cablecos to form a giant with 30 million subscribers after significant divestitures.
DirecTV has 20.3 million pay-TV subscribers in the US and AT&T has 5.7 million, meaning the deal will create a giant with 26 million video customers. AT&T CEO Randall Stephenson previously said that the Comcast/TWC tie-up refocused his company’s attention on the US market, when it had been exploring entering the European market.
Wave of consolidation
It may not be the last big consolidation deal in the US this year. Softbank’s CEO is reported to still be keen on merging his American unit Sprint Corp with its smaller rival T-Mobile US to create a similar-sized mobile operator to AT&T and Verizon Wireless. That’s despite noises from the regulators which suggest that they would not be in favour of seeing the wireless market shrink from four players to three. 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,” he said. “Verizon has shown a willingness to respond to AT&T’s strategic initiatives,” he added.
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 would have bought AT&T significant spectrum assets.
Wells Fargo analyst Jennifer Fritzsche said that 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.
Fellow Wells Fargo analyst, Marci Ryvicker, said in a memo that she wouldn’t discount a deal between Dish and Verizon, but said 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.
Long review expected
Ryvicker warned that the fact there were now multiple deals in front of the government could slow down the regulatory process.
DirecTV anticipates the regulatory process will hold the companies back from closing of the transaction for a year. While DirecTV is a DTH operator and AT&T’s main business is mobile, fixed-line and broadband services, the two companies’ pay-TV operations compete with one another in regions where AT&T’s U-Verse service is available.
It will also create a more powerful player for content providers and equipment suppliers to deal with.
There is no break-up fee built into the transaction from AT&T’s side. The telco had its fingers burnt by such a clause in its failed attempt to acquire T-Mobile USA in 2011 – AT&T ended up paying the Deutsche Telekom-owned operator US$3bn in cash plus spectrum valued at up to US$4bn.
DirecTV has agreed a US$1.4bn break-up fee to AT&T, or roughly 3% of the deal value, if it decides to accept a higher bid from a rival bidder. The DTH provider is also said to be comfortable without a break-up fee from AT&T as it is confident the merger will not face significant regulatory hurdles.
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.
The deal gives Stephenson the foreign growth opportunities that he has previously said AT&T needs, given that growth in the US market has slowed.
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 DirecTV’s satellite platform’s broad reach 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.
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.
