AT&T / Direct TV Deal – Buyer Beware

AT_T_Direct_TV_-_Google_SearchBy David Nelson, CFA

In a deal rumored for weeks AT&T (T) is buying Direct TV (DTV) for $49 Billion or about $95 per share in cash and stock. Both boards have approved the deal and now begin the long regulatory process that follows. All of this comes on the heels of Comcast’s (CMCSA) bid for Time Warner Cable (TWC) which is now being reviewed by the FCC.

AT&T has decided that video is critical to their future and a combination with Direct gives them the scale they seek.

The Technology Problem 

While they get the subscribers and national footprint they’ve been looking for they also lock into a technology with a huge problem.

TV viewing habits are changing as video consumption moves online. Download and upload speeds for satellite rank near the bottom when compared to cable and even faster packages like Verizon’s (VZ) Fios. It takes a 1/4 of a second for the speed of light to make a round trip to a geostationary satellite 36,000 km above the earth’s surface. This creates latency problems slowing down the internet experience for customers and even makes some applications useless.

direct_tv_satellite_-_Google_SearchCustomers are using a variety of devices to access streaming content along with their traditional internet services. Netflix (NFLX), Amazon Prime (AMZN) and Apple (AAPL) TV are gaining in popularity not to mention traditional broadcasters are increasingly moving prime time content to the net.

The battle between Aereo and broadcasters puts the issue front and center and may speed up the process. Aereo is currently giving customers access to over the air broadcast via the internet for a very low fee. Some broadcasters have threatened; if they lose in the Supreme Court they will move their content online.

How Direct TV’s technology will deal with this tidal wave of change remains unclear. When it comes to streaming, the size of the pipe is critical. I fail to see how they remain competitive as viewing habits change, except in areas of the country without the infrastructure.

The Good News

At the announced price the deal is likely accretive. Morgan Stanley analyst Simon Flannery says in recent note that with programing, sales, marketing and capex synergies, the deal could be 4% accretive to EPS and 10% accretive to free cash flow. With the 10 year yielding 2.5% it’s also hard for yield hungry investors to ignore the 5% dividend.

The real appeal may be international although some have said T may sell-off Direct’s Latin America division.

Comcast – Time Warner Cable Deal Could Be Delayed

Jonathan Atkin of RBC points out in a recent note that a T/DTV combination could delay the Comcast/Time Warner Cable deal by several months. At the very least it would change the calculus and complicate the analysis the DOJ and FCC are conducting right now.

Perhaps I will learn something in the next few days that will change my mind but for now my congratulations to DTV shareholders and as for AT&T (T), I’m not interested.