The telecom industry has been rapidly consolidating with Internet, cable and phone companies taking turn gobbling each other up. The latest pending deal on the table is between DIRECTV (NASDAQ:DTV) and AT&T Inc. (NYSE:T). So what are the implications of the deal if it happens? Analysts from several firms have provided their insight.
Why a deal between DIRECTV and AT&T may make sense
Last week AT&T Inc. (NYSE:T) revealed that it wants to buy DIRECTV (NASDAQ:DTV) for about $95 per share. The deal is about 70% stock and 30% cash, and the combined company would have the second biggest base of video subscribers, according to Barclays analysts. In a report dated May 19, 2014, analysts Amir Rozwadowski, Sandeep Gupta and Arindam Basu note that some investors could be questioning whether there’s any value created for the long term, particularly because the two companies don’t seem to go together.
Many value investors have given up on their strategy over the last 15 years amid concerns that value investing no longer worked. However, some made small adjustments to their strategy but remained value investors to the core. Now all of the value investors who held fast to their investment philosophy are being rewarded as value Read More
However, the Barclays team said the deal seems “to check the boxes of why AT&T may have been looking to pursue a deal.” They think it looks accretive to both earnings and net free cash flow and provides support for AT&T Inc. (NYSE:T)’s “financial obligations.” They also believe it diversifies the carrier’s user base away from the wireless business, which is beginning to mature, and adds a strategic option which is better for the long term.
Baird analysts also believe the deal between DIRECTV (NASDAQ:DTV) and AT&T Inc. (NYSE:T) looks financially solid. AT&T did say it expects it to be accretive on both free cash flow and earnings within 12 months of the close. In addition, cost synergies are estimated to hit $1.6 billion every year within three years after the deal closes. In a report dated May 19, 2014, Baird analysts William V. Power, Steven J. Beckert and Andrew T. Flis say they believe a deal between the two companies will provide modest improvements to AT&T’s dividends.
What will happen to DIRECTV, AT&T competitors?
If the two companies merge, the Baird team notes that there will be implications for multiple competitors of both companies. They believe most of the focus will be on DISH Network Corp (NASDAQ:DISH). If DIRECTV (NASDAQ:DTV) ends up merging with AT&T Inc. (NYSE:T), they think a deal between DISH and Sprint Corporation (NYSE:S) and / or T-Mobile US Inc (NYSE:TMUS) is likely.
They also say Verizon Communications Inc. (NYSE:VZ) could feel pressured to start its own nationwide video content distribution service, which would be why it might go after DISH Network Corp (NASDAQ:DISH). Barclays analysts suggest DISH may even make a counterbid.
The Baird team sees little to no impact on competition within the cable industry. They also see some positives for both Synchronoss Technologies, Inc. (NASDAQ:SNCR) and Amdocs Limited (NASDAQ:DOX) if the deal happens.
What about regulators?
Analysts generally expect regulators to allow DIRECTV (NASDAQ:DTV) ad AT&T Inc. (NYSE:T) to merge without too many problems. The Baird team raises the question of what they might do about AT&T’s U-verse service, as there is some overlap there. They also note that AT&T has agreed to more rural broadband build-outs and to abide by net neutrality rules for three years. In addition, the company said it would divest its stake in America Movil to speed up approval from regulators.
The Barclays team also doesn’t expect much pushback from regulators. However, they think regulators might not be able to expedite the review process because they “have their plates full.”