AT&T acquires DirecTV for $48.5bn
May 19, 2014
By Colin Mann and Chris Forrester
In a move set to create a content distribution leader across mobile, video and broadband platforms, with unparalleled video content distribution scale in the US, AT&T and DirecTV have entered into a definitive agreement under which AT&T will acquire DirecTV in a stock-and-cash transaction for $95 per share based on AT&T’s Friday closing price. The agreement has been approved unanimously by the Boards of Directors of both companies.
The pair say the transaction combines complementary strengths to create a unique new competitor with unprecedented capabilities in mobility, video and broadband services.
DirecTV is the premier pay TV provider in the US and Latin America, with a high-quality customer base, the best selection of programming, the best technology for delivering and viewing high-quality video on any device and the best customer satisfaction among major U.S. cable and satellite TV providers. AT&T has a best-in-class nationwide mobile network and a high-speed broadband network that will cover 70 million customer locations with the broadband expansion enabled by this transaction.
The content distribution scale of the new company will better position the company to meet consumers’ future viewing and programming preferences, whether traditional pay TV, on-demand video services such as Netflix or Hulu streamed over a broadband connection (mobile or fixed) or a combination of viewing preferences on any screen.
The transaction enables the combined company to offer consumers bundles that include video, high-speed broadband and mobile services using all of its sales channels – AT&T’s 2,300 retail stores and thousands of authorised dealers and agents of both companies nationwide.
“This is a unique opportunity that will redefine the video entertainment industry and create a company able to offer new bundles and deliver content to consumers across multiple screens – mobile devices, TVs, laptops, cars and even airplanes. At the same time, it creates immediate and long-term value for our shareholders,” said Randall Stephenson, AT&T Chairman and CEO. “DirecTV is the best option for us because they have the premier brand in pay TV, the best content relationships, and a fast-growing Latin American business. DirecTV is a great fit with AT&T and together we’ll be able to enhance innovation and provide customers new competitive choices for what they want in mobile, video and broadband services. We look forward to welcoming DirecTV’s talented people to the AT&T family.”
“This compelling and complementary combination will bring significant benefits to all consumers, shareholders and DirecTV employees,” said Mike White, president and CEO of DirecTV. “US consumers will have access to a more competitive bundle; shareholders will benefit from the enhanced value of the combined company; and employees will have the advantage of being part of a stronger, more competitive company, well positioned to meet the evolving video and broadband needs of the 21st century marketplace.”
DirecTV has premier content, particularly live sports programming. It has the exclusive pay TV rights to NFL SUNDAY TICKET that provides every out-of-market game, every Sunday afternoon, on TV, laptops and mobile devices. The pair say the new AT&T will be better positioned to develop unique content offerings for consumers through, among other initiatives, AT&T’s joint venture with The Chernin Group. DirecTV’s content ownership currently includes ROOT SPORTS Networks and minority stakes in the Game Show Network, MLB Network, NHL Network and the Sundance Channel.
DirecTV will continue to be headquartered in El Segundo, California, after the deal closes.
Together, the companies say they will be a stronger competitive alternative to cable for consumers wanting a better bundle of top-quality broadband, video and mobile services, as well as a better customer experience and enhanced innovation. Consumers will also benefit from the combined companies’ additional scale in video content distribution across its mobile, video and broadband networks. The combined company will continue to provide the world-class service and best video and entertainment experience for which DirecTV is known.
With the benefits of the transaction, AT&T is able to commit to do the following, when the deal closes:
- 15 Million Customer Locations Get More High Speed Broadband Competition. AT&T will use the merger synergies to expand its plans to build and enhance high-speed broadband service to 15 million customer locations, mostly in rural areas where AT&T does not provide high-speed broadband service today, utilising a combination of technologies including fibre to the premises and fixed wireless local loop capabilities. This new commitment, to be completed within four years after close, is on top of the fibre and Project VIP broadband expansion plans AT&T has already announced. Customers will be able to buy broadband service stand-alone or as part of a bundle with other AT&T services.
- Stand-Alone Broadband. For customers who only want a broadband service and may choose to consume video through an over-the-top (OTT) service like Netflix or Hulu, the combined company will offer stand-alone wireline broadband service at speeds of at least 6 Mbps (where feasible) in areas where AT&T offers wireline IP broadband service today at guaranteed prices for three years after closing.
- Nationwide Package Pricing on DirecTV. DirecTV’s TV service will continue to be available on a stand-alone basis at nationwide package prices that are the same for all customers, no matter where they live, for at least three years after closing.
- Net Neutrality Commitment. Continued commitment for three years after closing to the FCC’s Open Internet protections established in 2010, irrespective of whether the FCC re-establishes such protections for other industry participants following the DC Circuit Court of Appeals vacating those rules.
- Spectrum Auction. The transaction does not alter AT&T’s plans to meaningfully participate in the FCC’s planned spectrum auctions later this year and in 2015. AT&T intends to bid at least $9 billion in connection with the 2015 incentive auction provided there is sufficient spectrum available in the auction to provide AT&T a viable path to at least a 2×10 MHz nationwide spectrum footprint.
DirecTV’s Latin American business is the leading pay TV provider in the region and has more than 18 million subscribers, including all Sky Mexico customers. DirecTV’s satellite platform’s broad reach remains advantaged when compared with cable and telco in Latin America. Latin America has an underpenetrated pay TV market (about 40 per cent of households subscribe to pay-TV) and a growing middle class, and is DirecTV’s fastest growing customer segment.
Summary Terms of Transaction
DirecTV shareholders will receive $95.00 per share under the terms of the merger, comprised of $28.50 per share in cash and $66.50 per share in AT&T stock. The stock portion will be subject to a collar such that DirecTV shareholders will receive 1.905 AT&T shares if AT&T stock price is below $34.90 at closing and 1.724 AT&T shares if AT&T stock price is above $38.58 at closing. If AT&T stock price at closing is between $34.90 and $38.58, DirecTV shareholders will receive a number of shares between 1.724 and 1.905, equal to $66.50 in value.
This purchase price implies a total equity value of $48.5 billion and a total transaction value of $67.1 billion, including DirecTV’s net debt. This transaction implies an adjusted enterprise value multiple of 7.7 times DirecTV’s 2014 estimated EBITDA. Post-transaction, DirecTV shareholders will own between 14.5% and 15.8% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding today.
AT&T intends to finance the cash portion of the transaction through a combination of cash on hand, sale of non-core assets, committed financing facilities and opportunistic debt market transactions.
To facilitate the regulatory approval process in Latin America, AT&T intends to divest its interest in América Móvil. This includes 73 million publicly listed L shares and all of its AA shares. AT&T’s designees to the América Móvil Board of Directors will tender their resignations immediately to avoid even the appearance of any conflict.
The pair say the transaction creates immediate and long-term shareholder value. AT&T expects the deal to be accretive on a free cash flow per share and adjusted EPS basis within the first 12 months after closing. The combination provides significant opportunities for operating efficiencies. AT&T expects cost synergies to exceed $1.6 billion on an annual run rate basis by year three after closing. The expected synergies are primarily driven by increased scale in video. Along with DirecTV’s current strong cash flows, this transaction is expected to support future investment in growth opportunities and shareholder returns.
The combination diversifies AT&T’s revenue mix and provides numerous growth opportunities as it dramatically increases video revenues, accelerates broadband growth and significantly expands revenues from outside the United States. Given the structure of this transaction, which includes AT&T stock consideration as part of the deal and the monetisation of non-core assets, AT&T expects to continue to maintain the strongest balance sheet in the industry following the transaction close.
AT&T’s 2014 guidance for the company remains largely unchanged. However, the company’s intention is to divest its interest in América Móvil, which will result in an approximately $0.05 reduction in EPS, as the América Móvil investment will no longer be accounted for under the equity method. Adjusted 2014 EPS growth is now expected to come in at the low-end of the company’s mid-single digit guidance.
The merger is subject to approval by DirecTV shareholders and review by the US Federal Communications Commission, US Department of Justice, a few US states and some Latin American countries. The transaction is expected to close within approximately 12 months.
The acquisition gives AT&T some 20.3 million extra US subscribers as well as an additional – and faster growing – 11.9 million Latino subs, plus a 41 per cent stake in Sky Mexico which represents an additional 6.1 million subs. AT&T has about 10.4 million of its own U-verse subscribers.
However, the deal is not cheap. As well as the prime purchase price, AT&T also has to absorb a debt load that will cost $20.8 billion. DirecTV’s share price has risen by some 75 per cent over the past year as rumours of the deal built up.
The deal is the latest in a series of mega-mergers that AT&T has considered in what some have described as a ‘beauty parade’ which has included T-Mobile and Vodafone. Meanwhile other media marriages include the on-going plan for Comcast to acquire Time Warner Cable. Of course, there’s also plenty of European M&A action, not least BSkyB’s examination of the Sky Germany and Italy assets.