AT&T's Direct Route into Cable Fray
It has been a while since U.S. telecom companies first got up in pay TV's business. But recent stirrings on the merger front show the industries are drawing ever closer.
In the latest example, AT&T reached out to DirecTV about a possible acquisition of the satellite-TV operator, The Wall Street Journal reported. Together, in video the two companies would rival the scale of a combined Comcast and Time Warner Cable, should a proposed deal between those two receive regulatory approval.
Indeed, Comcast's merger effort may have spurred AT&T to act, seemingly abandoning ambitions of expanding into Europe. AT&T's courting of DirecTV also comes against a backdrop of mounting competition—and possible consolidation—in the wireless industry along with the dual promises of wireless broadband and cable-Wi-Fi-enabled phone networks.
Tying up with AT&T could make sense for DirecTV, whose subscriber-growth rate has fallen year over year since 2010. As a satellite provider, DirecTV lacks its own broadband offering, which puts it at a disadvantage to cable peers.
AT&T's fiber broadband could fill that gap. For AT&T, buying DirecTV would give it access to the satellite company's free-cash flow. That could be valuable, as roughly 85% of AT&T's free cash flow is expected to go toward its dividend in 2014. And doubling down on video would make AT&T less exposed to wireless at a time when aggressive promotions by T-Mobile US have been shaking up the industry.
But buying DirecTV, which has an enterprise value of $59.5 billion, would hardly solve all of AT&T's problems. AT&T would be tying itself to a business in structural, if gradual, decline. Doing a deal also would mean passing up the opportunity to buy the satellite-TV company that also comes with a sizable swath of wireless spectrum: Dish Network.
Getting Dish to the bargaining table may, in fact, be AT&T's primary goal in talking to DirecTV. Indeed, Dish shares rose more than those of DirecTV Thursday.
Reports in March that Dish had approached DirecTV about a deal were viewed by some investors as Dish trying to flush out a buyer such as AT&T or Verizon Communications. The talks with DirecTV could be AT&T's way of returning the favor, essentially trying to spook Dish into lowering its price ambitions by threatening to buy its satellite rival.
Price would be a major hurdle to an AT&T bid for Dish. Charlie Ergen, the latter's chairman, controls the company and is likely to demand a significant premium. AT&T's latest move probably won't change that.
Still, with Dish, AT&T would get its hands on airwaves that it might otherwise have to buy at auction later on. It also would be keeping Dish's spectrum out of the hands of Verizon, which is focused on paying down debt from its acquisition of the rest of Verizon Wireless.
Granted, a deal with DirecTV might be simpler from a regulatory standpoint than with Dish due to the spectrum component. But the Federal Communications Commission will likely raise spectrum-ownership limits in a vote on May 15, easing the path for AT&T.
And, while not a slam dunk, an AT&T satellite deal would likely face less regulatory scrutiny than a possible Sprint bid for T-Mobile, according to Guggenheim Partners. Comcast's bid for Time Warner Cable also could pave the way for AT&T because the telecom company would look smaller from a video-subscriber perspective by comparison.
AT&T may not end up tying the knot with either satellite player. But the telecom and pay-TV industries are likely to get more entangled.
Write to Miriam Gottfried at Miriam.Gottfried@wsj.com