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How the NFL Could Kill DIRECTV-AT&T Merger

Updated from 10:08 a.m. to include more details about the DIRECTV/SUNDAY TICKET deal.

NEW YORK (TheStreet) -- The proposed $49 billion big merger between AT&T (T - Get Report) and DIRECTV (DTV - Get Report) is not about subscribers, free cash flow, dividend coverage or any other story you may read this morning. It's about football. More specifically, it's about the National Football League, which has become a television ratings powerhouse under Commissioner Roger Goodell.

Embedded in the 8-k filing is the fact that NFL Sunday Ticket, which has been on DIRECTV for years, could potentially kill the merger, should a deal not be consummated between the NFL and DIRECTV:

The parties also have agreed that in the event that DIRECTV's agreement for the "NFL Sunday Ticket" service is not renewed substantially on the terms discussed between the parties, the Company may elect not to consummate the Merger, but the Company will not have a damages claim arising out of such failure so long as DIRECTV used its reasonable best efforts to obtain such renewal. The obligation of each party to consummate the Merger is also conditioned upon the other party's representations and warranties being true and correct (subject to certain materiality exceptions), the other party having performed in all material respects its obligations under the Merger Agreement, receipt of certain tax opinions and the other party having not suffered a material adverse effect (as described in the Merger Agreement).

Giving the NFL such power is unusual in a merger more about video subscribers than anything else, but Hudson Square Research analyst Daniel Ernst notes DIRECTV is in talks to renew the deal, despite the NFL going around and shopping the package to other providers.

"Well of course, DTV [DIRECTV] just renewed that deal, presumably at a higher rate then they were paying previously, and the NFL presumably shopped the package to others and did not get a higher bid," Ernst said in an email. "So perhaps there is less leverage than you think. And perhaps, T [AT&T] included the disclosure in the 8K to signal, there is a level that if crossed they are willing to walk."

Shares of DIRECTV were down sharply in Monday trading, falling 2.1% to $84.37, while AT&T shares were off 1.8% to $36.07.

AT&T said it would buy DIRECTV for $48.5 billion in cash and stock, or $95 per share. The total amount of the deal would be $67 billion, when accounting for debt.

In late 2013, NFL Commissioner Roger Goodell was said to be shopping the package, which allows consumers to watch every NFL game on Sundays to companies such as Google (GOOG) via YouTube, and other technology companies.

In 2009, DIRECTV extended its agreement with the NFL for SUNDAY TICKET for four-years, at a price tag of $4 billion. The latest public comments from DIRECTV CEO Mike White is that the company and the NFL were continuing to talk about extending the deal, given the relationship the two companies have. There is currently one season left with the NFL for SUNDAY TICKET, as the deal expires between both parties at the end of the 2014-2015 NFL season.

The NFL has not been shy in recent years about adding technology to improve the viewing experience of its games. In recent years, it brought some of its games to Verizon (VZ), allowing users to watch Thursday and Sunday night games on their smartphones. Some teams have added tablets to help enhance the viewing opportunities in stadium, allowing fans to keep up to date on their fantasy teams. The NFL is clearly taking technological enhancements seriously, especially as ticket prices continue to remain elevated, and going to an actual game remains expensive.

On DIRECTV's latest earnings call, White noted the quarterly results were aided by SUNDAY TICKET. "You got to remember when you go from the fourth quarter to the first quarter, the fourth quarter, we had a very strong NFL SUNDAY TICKET program and with a number of takers and a number of paid takers," White said on the call. "So in the fourth quarter, we definitely saw a nice tailwind there."

ESPN Sports Business Reporter Darren Rovell noted that a deal would eventually get done, as both AT&T CEO Randall Stephenson and DIRECTV's White have talked to Goodell about the deal.

On the call discussing the merger, CEO White noted that DIRECTV has to go back to its content providers, the NFL chiefly among them, as the deal between Dallas, TX.-based AT&T and El Segundo, Calif.-based DIRECTV is more about mobile devices, something which DIRECTV offers none of.

White also noted DIRECTV is "still highly confident" about getting a deal done between both parties. "Discussions are very positive with the NFL."

Read Also: Buffett, Paulson Stakes in Verizon Set Bar High For AT&T

Read Also: AT&T's Bid Flunks Verizon Dividend Test

--Written by Chris Ciaccia in New York

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