To gain scale, AT&T will acquire DirecTV

In a bid to better compete in the video distribution arena, DirecTV has agreed to be acquired by AT&T, in a stock-and-cash transaction. The merger agreement has been approved unanimously by the Boards of Directors of both companies.

Both companies hope the distribution scale achieved by the combined company will allow it to better satisfy consumers' preferences for traditional pay TV, on-demand video services like Netflix or Hulu streamed over a broadband connection (mobile or fixed) or a combination of viewing preferences on any screen.  

The combined company will be able 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 authorized 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.”

To appease regulators, AT&T committed to do the following, when the deal closes:  

• 15 Million Customer Locations Get More High Speed Broadband Competition. AT&T will 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, utilizing a combination of technologies including fiber and fixed wireless. This new commitment, to be completed within four years after close, is on top of the fiber 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.
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• 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.
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• 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.
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• 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.
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• 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 2x10 MHz nationwide spectrum footprint.

Latin America is key

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. Latin America has a large potential upside in the pay TV market as about 40% of households subscribe to pay TV. In terms of technology, DirecTV's satellite platform’s reach retains has an advantage when compared with cable and telecomm in the region.

To facilitate the regulatory approval process in Latin America, AT&T intends to divest its interest in América Móvil. AT&T’s designees to the América Móvil Board of Directors will resign immediately "to avoid even the appearance of any conflict." 

Financial terms

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. 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.