NEW YORK (TheStreet) - Telecom giant AT&T (T - Get Report) is reportedly in advanced talks to buy DirecTV (DTV - Get Report) for around $50 billion. This is not the first time AT&T, which has always had global ambitions, has pursued growth via M&A.
Last year there was the rumored deal for Telefonica (TEF), which was ultimately rebuffed by the Spanish government. Telefonica had the sort of business from which AT&T could create incremental value. It just wasn't meant to be. Then AT&T turned its attention to Leap Wireless (LEAP), which it bought for $4 billion.
Despite its efforts, shares are down 7% over the past 12 months. Tuesday, the the stock closed down 1% to $36.20. Shares are up 5.6% year to date.
Management has come under severe scrutiny. Questions have been raised about AT&T's growth prospects. And there are those who doubt that this company has what it takes to deliver the sort of market-beating performances seen from rival Verizon (VZ). And some analysts are not ready to dial in to any potential benefits of a DirecTV acquisition.
Michael McCormack, analyst at Jefferies, was blunt, stating that both DirecTV and rival Dish Network (DISH) "would probably like to be merged with or acquired by just about anybody." While discussing the future of TV watching, McCormack added that "they would be at a significant disadvantage." And aside from boosting AT&T's cash flow to facilitate dividend payments, he doesn't see much strategic upside to picking off DirecTV.
I have to agree here. McCormack brings up an interesting point, which goes back to the company's deal last year for Leap Wireless. To date, that acquisition still hasn't produced meaningful value.
This time, DirecTV has all of the makings of throwing good money after bad. Consider that AT&T is paying roughly a 40% premium. This is too much, especially now that DirecTV is dealing with slowing subscriber growth. And DirecTV won't help AT&T in terms of Internet services. DirecTV just doesn't have the infrastructure to deliver Internet to homes.
At the time of the announced deal, DirecTV was trading below $70. The stock closed Tuesday at $86.08. But a $50 billion sale price should send the valuation to the $95 range and higher. And when you factor DirecTV's $16 billion debt, the enterprise value jumps to $66 billion.
With almost $4 billion in cash on the balance sheet and another $35 billion in operating cash flow, AT&T has the financial muscle to make this deal work. But beyond "flexing its muscles" at smaller rivals like T-Mobile (TMUS) and Sprint (S), this deal doesn't make much sense.
The other concerns is about future wireless auctions. AT&T won't have much flexibility to go after real value-creating assets if it's tying up its capital with DirecTV in a deal that is unlikely to be accretive.
This deal would weaken AT&T, making it a sell, while at the same time anointing Verizon the clear investment choice within the telecom space.
>>Read More: Intuit Says, Lettuce Help Run Your Small Business
>>Read More: Volkswagen Launches the People's Electric Car
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.