AT&T to Buy DirecTV in $49 Billion Deal, Creating Pay-TV Giant
AT&T's and DirecTV's Boards Approve Acquisition Agreement
AT&T Inc. T +0.60% agreed to acquire DirecTV DTV +1.25% for $49 billion, a deal that would make it a major player in pay television and increase its clout with media companies at a time when video consumption is moving online.
The agreement, which the companies' boards approved on Sunday, comes just three months after Comcast Corp.'s CMCSA -0.24% $45 billion agreement to buy Time Warner Cable Inc. TWC -0.26%
The deals show how the biggest companies in television and telecommunications are bulking up to face a changing media landscape. Growth is slowing in some markets, like pay TV and wireless subscriptions, and is exploding in others, like streaming video. The companies are betting that bigger scale will give them the resources to invest in new capabilities and the leverage to hammer out commercial arrangements in the media world.
The combination would create a company with 26 million pay-TV subscribers in the U.S. That is second only to Comcast and Time Warner Cable, which would have about 30 million combined subscribers if regulators approve their deal and pending divestitures are completed.
"There would not be many people who could put together something with a nationwide mobile platform, nationwide video platform and a 70 million household broadband build," AT&T Chief Executive Randall Stephenson said in an interview.
AT&T said it would pay $95 per DirecTV share, about $66.50 a share in the form of its own shares and $28.50 in cash.
The companies have considered a combination for years and the CEOs came to the basic outline of the deal two weeks ago, Mr. Stephenson said. DirecTV CEO Mike White gave him a tour of the DirecTV offices in Los Angeles, and the final terms were sealed between the two over the phone, he said.
The deal is Mr. Stephenson's biggest bet so far and is AT&T's largest acquisition since its 2006 purchase of BellSouth for $85 billion. Mr. Stephenson became CEO in 2007 after his predecessor, Ed Whitacre, took a regional phone company and turned it into a national giant.
Mr. Stephenson has struggled to pull off a big-ticket transaction. He attempted to buy T-Mobile US Inc. TMUS -0.51% in 2011, but was shot down amid regulatory concerns. He said on Sunday the Comcast deal didn't factor into his decision on DirecTV, saying that the two deals aren't similar in nature and highlighting the mobile-video aspect of the combination.
For DirecTV, the combination ends a period of uncertainty during which the company has struggled to chart a road map for growth in a stagnating U.S. pay-TV industry. Unlike cable providers, the satellite company doesn't have a piece of the burgeoning broadband-access market.
DirecTV's smaller but faster-growing Latin American arm, which serves 12 million subscribers, has come under pressure due to political and economic instability in the region. Mr. White has recently played down those threats.
The deal leaves Dish Network Corp. in an uncertain position strategically. Many analysts have seen AT&T and DirecTV as potential buyers of the satellite-TV provider. Verizon Communications Inc. VZ +2.31% was also seen by some industry experts as a potential acquirer of Dish but has signaled it isn't interested in a deal.
A spokesman for Dish pointed to a conference call in which its chairman outlined its strategic options, saying: "We have to be well positioned so that no matter what happens it's all good for us, and I think we're there."
Many Wall Street analysts have questioned whether DirecTV has significant strategic value to AT&T, especially as U.S. wireless competition has picked up with the resurgence of T-Mobile and SoftBank Corp.'s acquisition of Sprint Corp. last year.
AT&T, which has 5.7 million subscribers for its U-Verse TV service, will become a more powerful force in pay TV by joining with the larger DirecTV. Theoretically, as a bigger provider, AT&T would get better rates from companies that license TV programming.
Still, media executives said, AT&T won't automatically get those volume discounts without thorny negotiations.
Having DirecTV in the fold could also advance AT&T's ambitions in online video. Like many other telecom and tech companies, it is looking for ways to capitalize on surging consumer demand typified by the growth of streaming services like Netflix. Last year, AT&T and DirecTV each made unsuccessful bids for streaming service Hulu LLC, whose owners ultimately decided not to sell.
AT&T has started approaching media companies about a potential "over the top" Web video service that would run on wireless broadband connections and serve up TV programming, people familiar with the matter said. The company also recently formed an online video venture with media mogul Peter Chernin and said it is weighing a number of online-video options, including launching niche services or premium products like Netflix's.
AT&T's main rival, Verizon, has taken similar steps and is further along, some media-industry executives said. Like AT&T, it is interested in deploying a technology called "multicasting," which can deliver bandwidth-intensive video streams to many users simultaneously without tying up too much spectrum—the frequencies used to transmit voice and video wirelessly.
Verizon in January bought Intel Corp.'s "OnCue" media unit, and it has approached several TV-channel owners about launching a wireless TV service, said people familiar with the approaches. Verizon declined to comment.
One clear benefit for AT&T from the acquisition, analysts said, is that DirecTV's cash flow will help the company cover its almost-$10 billion in annual dividend payments. In January, AT&T projected 2014 free cash flow of $11 billion, making many analysts nervous about its ability to cover the payout.
The agreement puts another major communications deal in front of regulators, combining companies that operate in industries where Americans already have narrowing choices and overseers have expressed a desire to promote competition.
In part to allay concerns from regulators, AT&T stressed in its news release that it would invest in rural broadband, commit to abide by net-neutrality rules and spend at least $9 billion in a coming government auction of wireless airwaves.
As part of the deal, AT&T plans to sell its long-held $6 billion stake in Latin American phone giant America Movil SAB to avoid regulatory conflicts.
John Bergmayer, senior staff attorney with advocacy group Public Knowledge, warned that AT&T will need to demonstrate that new services would offset any harm to the wireless and video markets.
"The industry needs more competition, not more mergers," he said. "The burden is on AT&T and DirecTV to show otherwise."
"It just doesn't make sense to me," said New Street Research analyst Jonathan Chaplin, who asserts that AT&T would be better off buying Dish Network because of that company's wireless-spectrum holdings.
The acquisition raises the prospect that AT&T customers may one day watch "Mad Men" episodes or football games over a fast cellular broadband connection without subscribing to traditional pay-TV service, but developing such offerings may be difficult. Nothing is likely to change in the short term for AT&T or DirecTV customers.
Blair Levin, former chief of staff at the Federal Communications Commission and author of its road map for expanding Internet access, said it's not immediately clear how the deal would impact consumers. While the deal could be perceived as eliminating a competitor in 25% of the country and result in higher prices, DirecTV is a national service and therefore prices may stay in check due to competition in other markets. AT&T will also be able to package wireless-phone service with home-TV subscriptions, which could result in better deals.
Mr. Levin said AT&T's acquisition of DirecTV was likely a response to Comcast's Time Warner deal.
"Sometimes, deals are driven by hope and opportunity and sometimes they're driven by fear and locking down customer bases," Mr. Levin said.