AT&T, DirecTV say their $48.5B merger is good for everyone
AT&T CEO Randall Stephenson says the combined broadband service and media company will come out of the gate with bundled deals for consumers.
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Roger Cheng (he/him/his) was the executive editor in charge of CNET News, managing everything from daily breaking news to in-depth investigative packages. Prior to this, he was on the telecommunications beat and wrote for Dow Jones Newswires and The Wall Street Journal for nearly a decade and got his start writing and laying out pages at a local paper in Southern California. He's a devoted Trojan alum and thinks sleep is the perfect -- if unattainable -- hobby for a parent.
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The companies have a lot of convincing to do. Consumer advocacy groups have already bashed the deal as the creation of another media industry giant, while financial analysts remain skeptical about the potential advantages of combining the second-largest wireless carrier in the US with the nation's largest satellite-TV provider.
AT&T 's planned $48.5 billion acquisition of DirecTV will allow it to expand its video services' reach across the nation, beyond the limits of its own wireline infrastructure. DirecTV, meanwhile, can finally pair its satellite TV service with an Internet connection -- long seen as its missing link. The deal comes after Comcast's own proposed $45.2 billion acquisition of Time Warner Cable.
That's why AT&T CEO Randall Stephenson and DirecTV CEO Mike White hopped on a Monday conference call to answer questions from Wall Street -- part of what will be a 12-month campaign to win over investors, regulators, and consumers.
AT&T shares fell 1.4 percent, or 51 cents, to $36.23 in recent trading. DirecTV shares fell 2.1 percent, or $1.78, to $84.40, below the cash-and-stock offer that values them at $95 a share.
Stephenson and White expanded on the main talking points from Sunday's announcement, again talking about the opportunities that will emerge from the combination.
"You'll have something very special when it's consummated," Stephenson said.
"This is an enormous growth opportunity for DirecTV, and not something we could have gotten with any other partner," White echoed.
Analysts, however, weren't as enthusiastic.
"We believe DirecTV offers little strategic value to AT&T," said New Street Research analyst Jonathan Chaplin.
One investor excited about the news is Warren Buffett's Berkshire Hathaway, which is the largest investor in DirecTV.
"This is a terrific transaction for all involved: Enhanced choice for consumers coupled with increased value for both AT&T and DirecTV shareholders -- a natural," said Berkshire Hathaway managers Todd Combs and Ted Weschler in a statement.
On more than one occasion, Stephenson and White noted that the estimated potential savings and revenue growth from the merger, referred to as synergies in industry speak, is conservative, and both believe the bundling of DirecTV's video service with AT&T's wireless and broadband services will drive additional growth. Stephenson in particular seemed excited to get going.
"We're going to get our playbook set and come out of the gate really hard," he said about the potential for bundled services.
In 12 to 18 months, Stephenson teased, there would be even more "robust video offerings."
Part of the opportunity that hasn't been factored into the merger cost savings, which are estimated to exceed an annual rate of $1.6 billion by year three, is the ability for AT&T to sell its mobile service to DirecTV customers.
Stephenson said that AT&T is underpenetrated at DirecTV, meaning the share of DirecTV customers who are also AT&T Wireless customers is lower than the national market share. He noted that AT&T Mobility CEO Ralph de la Vega gets excited about tapping into that kind of market potential.
Stephenson praised DirecTV for the having the best brand in the pay-TV business, the highest quality customer base, and the most attractive programming deals. That's a far cry from his last major deal, in which he attempted to downplay T-Mobile's ability to compete and operate effectively in the wireless industry. Regulators ultimately shut the deal down.
On the regulatory side, Stephenson said the commitments to the older and stricter standard of Net neutrality, standalone broadband and DirecTV service, and expanded broadband coverage into rural markets was a proactive attempt to assuage potential concerns from government officials who will need to approve this deal.
Despite DirecTV's sterling reputation, its own customer growth has slowed over the years as competition heats up in the pay-TV market. Down the line, the proliferation of cord cutting, or the phenomenon of consumers relying solely on their Internet connection for video, could further hurt the industry.
"We are wary, however, that buying a big US video business into what are likely secular declines in traditional video subscriptions could be just one more growth problem for AT&T long term rather than a solution," said JP Morgan analyst Philip Cusick, though noting he sees some near-term positives from the deal.
DirecTV has a healthy Latin America business that AT&T believes is another source for growth. In addition to its pay-TV business, it has slowly been accumulating spectrum in different countries and starting up a wireless service, an area that AT&T has some experience in.
"To have AT&T and their expertise, we'll be able to look at (mergers and acquisitions) opportunities differently," White said, noting that he had previously avoided looking at some deals because he felt it wasn't a part of DirecTV's core business.
Both executives also talked up the ability to strike new deals with the content companies, offering them a wider audience. After the combination, AT&T can boast 26 million pay-TV customers, roughly 100 million wireless subscribers, and a broadband network that is available to 70 million people. Those new deals will mean video to different screens, including smartphones, TVs, and even planes and cars.
"I have little doubt that for us to offer additional services will require additional discussion with the content folks," Stephenson said. "There's money to be made on both sides."
One key content provider is the National Football League. It's such an important aspect that the deal hinges on DirecTV renewing its "Sunday Ticket" package with the NFL.
White said he and Stephenson had already spoken to NFL Commissioner Roger Goodell about the merits of the deal. He added he expects to close the renewal by the end of the year, before the expected close of its deal with AT&T.
"If anything, it unlocks further opportunity for the NFL," he said.
While the last six years of investment in the network has been to deliver more data, the next six years of investment will focus on the delivery of video, Stephenson said. While analysts had expected AT&T to talk about the consolidation of video services, he said there would be a number of different ways to deliver video, depending on whether it is on mobile, over-the-top, or satellite.
"I'm not hung up on the medium," he said. "We'll find the lowest cost for whatever screen."
Over the next three to four years, he said the experiences on the different screens would begin to merge, with the user interface sharing a consistent feel and look.
"We are convinced this is going to redefine the video industry," Stephenson said.