In a possible response to the inevitability(?) of a Comcast Corporation (NASDAQ:CMCSA) and Time Warner Cable Inc (NYSE:TWC) merger, it’s being reported that the two companies are in talks after AT&T Inc. (NYSE:T) approached DirecTV (NASDAQ:DTV) about a combination of their own. A deal between the two would create a pay-television behemoth that would serve over 25 million subscribers and give the Comcast merger some serious competition.

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Chief has no comment

On Tuesday during a conference call, refused to address the reports referring to media reports “about possible transactions that might involve DirecTV.” He said the rumors and reports were not “based on official sources of information and we don’t view it as productive to speculate about alternative business combinations which may or may not occur.”

It was the Wall Street Journal that reported the approach by AT&T Inc. (NYSE:T) last week, and that report has sent DirecTV (NASDAQ:DTV) stock on an march upwards to $88.25. In today’s trading, DirecTV has fallen back considerably dropping nearly 5% of its value. That still puts DirecTV’s market capitalization upwards of $43 billion.

AT&T in making the approach, is essentially showing that it believes its future will need to include video as a central part of its strategy. A deal with DirecTV (NASDAQ:DTV) would strengthen AT&T’s ability to expand its U-verse pay-TV service while building a structure for going forward with over-the-top services to deliver video content using wireless and broadband connections.

DirecTV cash to support AT&T dividend

If the two companies were to combine they would have annual revenues of around $160 billion which would certainly allow the company to throw its weight around a bit when negotiating TV and movie rights and licensing.

In addition to the added clout and leverage, a deal with DirecTV (NASDAQ:DTV) would provide AT&T Inc. (NYSE:T) with the free cash flow the company needs to pay its dividend for a decade or more according to a recent research not by UBS analyst John Hodulik.

“The deal would provide financial and operational synergies that appear to fit AT&T’s historic game plan,” Mr. Hodulik wrote.

Over the last eight years, DirecTV has spent nearly $30 billion in stock buybacks while its rival, Dish Network Corp., has spent billions to launch an online video service but is struggling with a lack of broadband services it can offer, a failing of satellite TV. DirecTV (NASDAQ:DTV) could avoid this pratfall with a merger with AT&T Inc. (NYSE:T).