As rumored for several months, AT&T Inc.agreed to buy satellite TV provider DirecTV for $48.5 billion, or $95 per share. Both companies described the deal as transformational as they seek to take on cable companies and online video providers, delivering content to multiple screens —on living room TVs, PCs, tablets and mobile phones.  The takeover was most likely stimulated by Comcast’s pending merger with Time Warner Cable which was proposed in February.  AT&T and DirecTV expect the deal to close within 12 months. 

With 5.7 million U-verse TV customers and 20.3 million DirecTV customers in the U.S., the combined AT&T-DirecTV entity would serve 26 million customers. That would make it the second-largest pay TV operator behind a combined Comcast-Time Warner Cable, which would serve 30 million subscribers.

“What it does is it gives us the pieces to fulfill a vision we’ve had for a couple of years – the ability to take premium content and deliver it across multiple points: your smartphone, tablet, television or laptop,” AT&T’s Chairman and CEO Randall Stephenson said on a conference call with journalists on May 18th.

However, the proposed acquisition could face unique regulatory scrutiny from the Federal Communications Commission (FCC) and Department of Justice. Unlike the cable company merger, the AT&T-DirecTV deal would effectively cut the number of video providers from four to three for about 25 percent of U.S. households. That’s a situation that could result in higher prices for consumers and usually gives regulators cause for concern.

Stephenson said those concerns would be addressed with a number of what he called “unprecedented” commitments. Among them:

– DirecTV would continue to be offered as a standalone service for three years after the deal’s closing.

– AT&T would offer standalone broadband service for at least three years after closing, so consumers could consume video from Netflix and other online services, with download speeds of at least 6 megabits per second where feasible.

– AT&T would expand high-speed broadband access to 15 million more homes – beyond the 70 million that could now get AT&T service – within four years.

– AT&T vowed to abide by the open Internet order from 2010 that the Federal Communications Commission is now in the process of revising after a court struck it down.

– AT&T vowed to sell its roughly 9 percent stake in Latin American wireless carrier América Móvil for about $5 billion.

“This is going to prove to be a pro-competitive and pro-consumer transaction,” Stephenson said.

The announcement also explicitly emphasizes that the new partners are committed to net neutrality despite all the recent FCC happenings. The two companies will demonstrate “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.” (These are the rules that were recently struck down and only impact Comcast at the moment due to that company’s previous merger with NBCU.)

Stephenson and DirecTV CEO Michael White both said the merger would allow the combined company to offer video over multiple screens, but acknowledged that deals with content providers to expand service on multiple platforms still need to be negotiated.

AT&T can walk away from this merger if DirecTV isn’t able to renew its prize “Sunday Ticket” offering with the National Football League (NFL) on “substantially…the terms discussed between the parties,” AT&T said in a filing with the Securities and Exchange Commission.  DirecTV’s current deal with the NFL expires at the end of the 2014 football season.  AT&T said it wouldn’t be able to seek damages if DirecTV fails to renew the deal “so long as DirecTV used its reasonable best efforts to obtain such renewal.”

On a call with analysts Monday morning (May 19th), DirecTV Chief Executive Mike White reiterated that he is “highly confident” DirecTV can renew the deal “before the end of the year.” He noted that both he and AT&T CEO Randall Stephenson met with NFL Commissioner Roger Goodell and New England Patriots owner Robert Kraft to convey “why this transaction is great for the NFL…as well as great for us.” 

The proposed merger/acquisition/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- in effect re-creating the Bell System and negating its divestiture.

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.

Assessment:

Growth is slowing in some markets, like pay TV and wireless subscriptions, and is exploding in others, like streaming video. Last year, pay TV subscribers in the U.S. fell for the first time, dipping 0.1 percent to 94.6 million, according to Leichtman Research Group.

While AT&T and DirecTV are doing better than cable companies at attracting TV subscribers, DirecTV’s growth in the U.S. has stalled while AT&T is growing the fastest of any TV provider.  The companies are betting that bigger scale will give them the resources to invest in new capabilities and the leverage to create commercial arrangements in the media world.  

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, a combined AT&T – DirecTV could get better rates from companies that license TV programming. 

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.  DirecTV offers neither fixed-line or mobile Internet service, and its rights to airwave frequencies for satellite TV are not the kind that AT&T can use to improve its mobile phone network.  Still, Mr. Stephenson has talked exuberantly about how the growth of online video helps boost demand for its Internet and mobile services.

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.  Last month, AT&T entered a joint venture with the Chernin Group (media mogul Peter Chernin) to invest in online video services. The company said it is weighing a number of online-video options, including launching niche services or premium on line video streaming products like Netflix offers. In particular, the acquisition raises the prospect that AT&T customers might someday be able to watch TV program episodes or football games over a fast cellular broadband connection without subscribing to a 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.

Other Opinions: 

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.

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.