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AT&T Said in Talks to Buy DirecTV for About $50 Billion

Monday, May 19, 2014

By Alex Sherman and Jeffrey McCracken  

May 13 - AT&T Inc., joining the ranks of U.S. TV, Internet and wireless providers racing to consolidate, is in advanced talks to acquire DirecTV for about $50 billion, according to people familiar with the matter.

Under the plan being discussed, management of DirecTV, the largest U.S. satellite-TV provider, will continue to run the company as a unit of AT&T, said the people, asking not to be named because the information is private. DirecTV Chief Executive Officer Mike White plans to retire after 2015, the people said.

The purchase would give AT&T a national satellite-TV provider to combine with its wireless, phone and high-speed broadband Internet services as competition ramps up. The pool of pay-TV customers is peaking in the U.S. because viewers are increasingly watching video online, and the combination would keep DirecTV from being on its own with just a TV offering and no competitive Internet package.

“With DirecTV they are getting a national TV presence — they can sell TV with wireless nationwide,” said Roger Entner, an analyst with Recon Analytics, based in Dedham, Mass. “AT&T has increasingly been breaking out of their 22-state landline footprint. They sell wireless, they started selling home security and they could add TV to that package.”

According to data compiled by Bloomberg BNA's Broadband Advisory Services, AT&T brought on 201,000 new U-verse TV subscribers in the first quarter of 2014 to end with 5.64 million video subs. AT&T in recent quarters has expanded the number of households that can receive its video services, but it remains below 27 million homes. DirecTV's U.S. operation serves about 20.27 million subs. DTV added just 12,000 net subscribers in the first quarter, however, a steep drop from 93,000 new subs in 4Q13 and 21,000 a year earlier.

The deal is more than a week away from being completed, said another person familiar with the matter, who added the sides were still in talks on a price which could come in close to $95 a share, depending on how much cash or stock is in the transaction. The person said White's departure was also still being negotiated. The price could go as high as $100 a share, two other people said.

Latin America

AT&T would be getting a pay-TV business that's expanding in Latin America and generating higher monthly bills from U.S. customers. DirecTV's exclusive content includes the National Football League Sunday Ticket package and products such as Genie, a multiroom digital video recorder.

Comcast Corp.’s plan to acquire Time Warner Cable Inc.—to create an even bigger provider of both TV and Internet in the U.S.—is accelerating the drive for consolidation in the rest of the industry. In March, AT&T CEO Randall Stephenson called the Time Warner Cable takeover an “industry-redefining deal.”

Regulatory Approval

The question with all of these potential tie-ups is whether regulators will allow them. Comcast's takeover of Time Warner Cable hasn't been approved yet. A merger of DirecTV and Dish Network Corp. was blocked more than a decade ago, and AT&T had to abandon a purchase of T-Mobile US Inc. several years ago in the face of antitrust opposition.

DirecTV and AT&T are planning on a 12-month regulatory process to review the deal, one of the people said.

“If regulators let Comcast buy Time Warner Cable, there's no reason they wouldn't let AT&T buy DirecTV,” Entner said. “They have to see it as part of a holistic market.”

Getting ownership of DirecTV's Latin American units would cause a conflict for AT&T, which holds an 8 percent stake in America Movil SAB— a direct competitor to DirecTV in countries including Brazil and Colombia. DirecTV's Latin America operation includes Mexico, where it has a minority stake in Sky Mexico, controlled by Grupo Televisa SAB, one of America Movil's biggest rivals.

DirecTV had also drawn merger interest from Dish Chairman Charlie Ergen, people with knowledge of the matter said in March. While a DirecTV merger is tempting, the satellite-TV rival is too expensive to pursue, Ergen said the week of April 5 on a conference call to discuss first-quarter earnings.

Debt Funding

“If DTV is willing to sell for $100 then it must be either concerned about its lack of broadband long term, worried about the viability of a Dish merger, or both,” Philip Cusick, an analyst at JPMorgan Chase & Co., wrote in a research note.

Darris Gringeri, a DirecTV spokesman, declined to comment as did Brad Burns, an AT&T spokesman. The Wall Street Journal reported earlier that AT&T is planning a stock and cash bid for DirecTV (DTV), without specifying the price.

AT&T can afford to add about $16 billion in debt to fund the DirecTV deal without risking a credit-rating downgrade, according to Erich Marriott, an analyst with Bloomberg Industries. The company is rated A3 by Moody's Investors Service and A- at Standard & Poor's, both four levels above junk.

Stock Portion

Adding $16 billion of debt would keep AT&T's ratio of debt to earnings before interest, taxes, depreciation and amortization below 2.5, the level at which credit ratings agencies have said may trigger a downgrade, Marriott wrote in a research note. The analysis assumes deal synergies of about 10 percent.

That implies that AT&T will need to offer a significant portion of stock to fund the $50 billion acquisition. The company has about $3.6 billion of cash and near-cash items and two revolving credit agreements with a combined $8 billion available, according to a regulatory filing.

“We were thinking AT&T would want to use as much debt as they can and that the deal could be all cash,” said John Hodulik, an analyst with UBS AG. “But that would mean the leverage would be about 2.7, and that's too high. I think they'd prefer 2.5 leverage.”

To contact the reporters on this story: Alex Sherman in New York at asherman6@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net

To contact the editors responsible for this story: Mohammed Hadi at mhadi1@bloomberg.net; Sarah Rabil at srabil@bloomberg.net

 ©2014 Bloomberg L.P. All rights reserved. Used with permission.

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