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AT&T Seeks to Redefine its Entertainment Offerings with $67B DirecTV Deal

NEW YORK (The Deal) -- AT&T (T - Get Report) CEO Randall Stephenson touted the benefits of adding satellite TV to the telecom's portfolio of services, in a Monday, May 19, call announcing the purchase of DirecTV (DTV - Get Report) for $67.1 billion, including debt.

AT&T would pay $95 per DirecTV share, in a combination of cash and stock, valuing the company's total equity at $48.5 billion.

The payout marks a 10.2% premium to DirecTV's Friday close, and values the El Segundo, Calif., satellite TV group at 7.7 times estimated 2014 Ebitda.

Stephenson said the deal would redefine the video entertainment business, by giving AT&T a new medium for distributing content alongside its wireless and broadband networks.

DirecTV has a nationwide satellite network. AT&T would become the second largest pay-TV company, and would gain leverage in negotiations with content producers. The Dallas telecom would also gain cash flow to support its dividend.

Stephenson described DirecTV's Latin American arm, with 18 million subscribers, as a growth business for AT&T in Monday's investor call.

"While this deal certainly has a number of positive elements, there are still several challenges that it will not resolve for [AT&T]," Jonathan Schildkraut of Evecore Partners wrote in a Monday note. Foremost, Schildkraut wrote, is that AT&T and DirecTV both are projected to have low single digit earnings growth for several years.

AT&T shares dropped 74 cents, or 2%, to $36 on Monday morning.

DirecTV fell $1.80, or 2%, to $84.38.

The deal has implications for Charlie Ergen's Dish Network Corp., which would lose two potential merger partners if AT&T acquires DirecTV.

Dish fell $1.84, or 3%, to $58.10.

Satellite TV provider Dish has stockpiled wireless spectrum that could appeal to AT&T. Dish has also explored the possibility of a merger with DirecTV for more than a decade.

"Our positive thesis on Dish was never predicated on an outright sale of the company to either [AT&T] or [Dish]," Wells Fargo Securities LLC analyst Marci Ryvicker wrote in a Monday note.

"That said, we did find comfort in the limited downside risk that these two potential alternatives provided should Charlie find himself unable to montizes his spectrum assets via a wireless partnership," she added.

The purchase comes as Comcast Corp. is buying Time Warner Cable Inc. for $67 billion. The cable groups have a side deal that would spin off or sell cable systems to Charter Communications Inc., possibly easing regulatory concerns.

The series of transactions also could motivate Verizon Communications Inc. to seek out a content deal.

AT&T expects to close the deal within 12 months.

To aid regulatory passage, the telecom said it will sell its shares in Carlos Slim's America Movil SAB de CV. Evercore's Schildkraut estimated that the stake is worth $5 billion to $6 billion in a Monday note. Even with the sale of the America Movil stake and cash on hand, Schildkraut estimated that AT&T will have to raise $7 billion in debt to fund the purchase.

Advising AT&T were Woody Young of Lazard and a Sullivan & Cromwell LLP team led by Joseph Frumkin and Eric Krautheimer. Randolph Smith is part of a team from Crowell & Moring LLP advising on anti-trust issues.

Goldman, Sachs & Co. and Bank of America Merrill Lynch bankers Chris Cormier and Steve Baronoff advised DirecTV.

The target received counsel from Weil, Gotshal & Manges LLP lawyers led by Fred Green and Partner Mike Lubowitz; a group from Jones Day headed by Joe Sims and Wiltshire & Grannis LLP.

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