CREDIT: REUTERS/JONATHAN ALCORN
(Reuters) – AT&T Inc plans to pay $48.5 billion to buy DirecTV, in the latest sign that the wireless industry and the U.S. television market are set to converge as customers consume more video on their mobile devices.
The deal, announced on Sunday, highlights AT&T’s pressing need for fresh avenues of growth beyond the maturing U.S. cellular business, which has become increasingly competitive.
The combination with DirecTV, the No.1 U.S. satellite TV provider with 20 million customers, would beef up Dallas-based AT&T’s packages of cellular, broadband, TV and fixed-line phone services.
For DirecTV, the deal will enable it to offer broadband Internet for the first time to its U.S. customers, filling in a gap that had made the company vulnerable to cable rivals, which can provide Internet service through their networks.
“It gives us the parts to fulfill a vision we have had for a couple of years, that is, the opportunity and the ability to take premium content and deliver premium content over multiple points for the customer, whether it be through a smartphone, through a tablet, or television or laptop,” said AT&T CEO Randall Stephenson, speaking on a conference call.
Stephenson’s counterpart at DirecTV, Mike White, will stay on to run the satellite televisionbusiness, which will continue to be based outside Los Angeles in El Segundo, California.
AT&T currently offers a video service known as U-Verse and Stephenson said during a conference call the company would continue to offer it after the acquisition is completed. It expects the deal to close in about a year.
AT&T and DirecTV made their announcement just a few months after Comcast Corpoffered $45 billion for Time Warner Cable Inc, a transaction that would create the leading U.S. cable and broadband Internet powerhouse. The Comcast proposal is now awaiting regulatory approval.
AT&T is offering $95 per DirecTV share in a combination of stock and cash, a 10 percent premium over Friday’s closing price of $86.18. It will finance the cash portion, $28.50 per share, with funds on hand, asset sales and financing already lined up.
The transaction has a total value of $67.1 billion, including the assumption of DirecTV’s net debt.
To help its case with regulators, AT&T will sell its roughly 8 percent stake in Carlos Slim’sAmerica Movil, worth roughly $5 billion. DirecTV has some 18 million customers throughout Latin America.
COMPETITIVE CONCERNS
The logic behind the long-expected deal has raised some doubts. Some analysts and investors have questioned why AT&T, which is facing slowing growth, would buy DirecTV at a time when growth in U.S. satellite TV subscriptions has stalled. The growth of web-based video services like Netflix and Hulu mean that demand for satellite TV will slow further in the coming years.
There are also potential anti-competitive hurdles to clear. AT&T is likely to face questions from regulators about the deal’s impact on competition in those areas where its U-verse service now competes with DirecTV in offering television.
AT&T said it expected to be able to add 15 million broadband customers, mostly in rural areas, within four years of the deal closing, adding to its base of 11 million current Internet customers.
Consumer advocates are already putting pressure on regulators to reject the deal.
“You can’t justify AT&T buying DirecTV by pointing at Comcast’s grab for Time Warner, because neither one is a good deal for consumers,” said Delara Derakhshani, policy counsel for Consumers Union, the advocacy arm of Consumer Reports.
The companies had thought about a combination for years, but discussions only took off in March following the Comcast-Time Warner Cable announcement.
The latest deal will immediately ratchet up the pressure on competitors. In particular, it raises questions about the No.2 satellite TV operator, Dish Network and what it might do. With 14 million subscribers, Dish trails DirecTV and has spent billions for wireless spectrum it has yet to use.
Dish’s chief, Charles Ergen, has said that he does not have the cash to outbid AT&T for DirecTV. Dish tried to buy DirecTV in 2001 in a deal that was blocked by regulators.
DirecTV is the latest in a string of big takeover targets that AT&T has considered. Those include a failed bid for T-Mobile USA in 2011, as well as a potential takeover of Vodafone Plc.
DirecTV, founded in 1994, has changed hands before. It had been previously owned by Hughes Electronics, which was part of General Electric, Rupert Murdoch’s News Corp, and its most recent owner Liberty Media, which sold its stake in 2009.
BUFFETT’S POSITION
The deal, which comes after a 25 percent gain in DirecTV’s stock price this year that was fueled by takeover speculation, represents a potential win for Warren Buffett’s Berkshire Hathaway, the satellite provider’s top shareholder.
Goldman, Sachs and Bank of America Merrill Lynch acted as financial advisers to DirecTV, and Weil, Gotshal & Manges LLP, Jones Day and Wiltshire & Grannis LLP served as legal advisers.
AT&T, which has an extensive internal M&A team, was also advised by Lazard, and on the legal side, Sullivan & Cromwell LLP, Crowell & Moring, Arnold & Porter, Sidley Austin, Kellogg Huber Hansen Todd Evans & Figel PLC and Gibson Dunn acted as legal advisors to AT&T.
DirecTV has agreed to pay a $1.4 billion breakup fee to AT&T in the event that it pursues another transaction with a higher bidder, the companies confirmed.
AT&T will not have to pay a penalty if regulators veto the deal.
