Potential Mega Deal: AT&T Looking to Purchase DirecTV

News of a potential buyout of DirecTV (DTV – Analyst Report) by AT&T (T – Analyst Report) emerged May 1, while information regarding the specifics are ranging, there seems to be massive traction over the past few days.  It has been reported (WSJ, Bloomberg, Reuters), that the purchase could be completed within the next few weeks.

The reports state that AT&T is looking at a price range between the mid $ 90’s to $ 100 per share of DirecTV stock.  Which means the total price would be between $ 48 billion and $ 50 billion (most likely, the deal will end up in that range).  This data could slightly change due to the fact the numbers have yet to be finalized.

There is an obvious correlation to the recent Time Warner Cable (TWC – Analyst Report) and Comcast Corp (CMCSA – Analyst Report) merger, and AT&T’s vigorous attempt to purchase the second largest pay-TV subscriber base in the country.  The buyout would increase AT&T’s wireless spectrum, and enables them to compete with the now massive Comcast Corp.  

This deal has been smoldering for about 10 years, as the two companies have been looking into a potential merger, or a buyout by both companies.  But with the recent Time Warner Cable, and Comcast merger, the environment seems perfect now.  

This buyout makes sense for both companies; satellite TV has been declining, and DirecTV has not been purchasing spectrum of late (unlike their direct competitor Dish Network, who has been purchasing spectrum).  DirecTV has also seen top line growth become stagnate, and margins have been declining since Q4 2012.  Therefore, this would be an opportune time for them to sell at a premium to AT&T.

AT&T has spectrum (the company will also increase their spectrum with the acquisition of DTV), and will add broadband to DirecTV customers.  AT&T, has a strong balance sheet and carries a debt to capital ratio of 46.6% (as of March 31).  Therefore, they can easily afford this deal.  

Both AT&T and DirecTV have seen their stock rise since the news first broke on May 1; AT&T has risen 2.78% while DirecTV has risen 7.92% as of the closing bell May 12.  Currently, AT&T carries a Zacks Rank #3 (Hold), and DirecTV also carries a Zacks Rank #3 (Hold).  

Finally, this deal will face scrutiny from Federal regulators due to the consolidation of the industry.  So this deal will most likely face a prolonged campaign to ensure the buyout adheres to all regulations.