I view the AT&T and DirecTV proposed merger as an attractive one. However, DirecTV's strong presence in Latin America makes the deal complicated for AT&T.
DirecTV is currently the largest satellite TV provider in the U.S. At 1 p.m. Wednesday, DirecTV's stock was at $85.85, down 0.3% for the day on reports that AT&T is close to buying the satellite TV provider.
Let's take a further look at the proposed $50 billion deal with AT&T.
The problem I see is the conflict in AT&T's potential ownership of DirecTV's Latin American divisions. AT&T holds 8% of America Movil (AMX), which competes with DirecTV in Mexico and other Latin American countries. DirecTV holds stake in Sky Mexico, controlled by Grupo Televisa (TV), one of America Movil's top rivals.
International markets such as Latin America have been off to a rough economic start for 2014, especially in two of its largest countries, Argentina and Brazil. Latin America faces a lower expected long-term growth rate and investor pessimism.
Billionaire Charles W. Ergen, CEO of DirecTV's main competitor, Dish Network (DISH) had also been under the microscope by investment bankers over this deal. Ergen spoke at a conference after the announcement of its first-quarter earnings, saying that his company was not in a position to make an offer for DirecTV, as some have suggested. "DirecTV would be too frothy for us, for our board to look at, at those kinds of prices," he said.
AT&T is said to be offering $95 to $100 a share for DirecTV -- quite a premium. So what could AT&T gain from the deal?
Bundling is a significant reason for AT&T to acquire DirectTV and further increase customer revenue. The bundle services, if combined, will include an estimated 25 million TV and video subscribers within AT&T's existing portfolio of phone, fiber-optic broadband, TV and wireless.
According to Bloomberg, the final deal could be confirmed within two weeks. "With DirecTV they are getting a national TV presence -- they can sell TV with wireless nationwide," said Roger Entner, an analyst with Recon Analytics, based in Dedham, Massachusetts. "AT&T has increasingly been breaking out of their 22-state landline footprint. They sell wireless, they started selling home security and they could add TV to that package."
Should investors buy DirecTV now?
Overall, DirecTV has been quite solid in delivering profits to investors. DirecTV shares have been up 14% over the past month as result of the deal speculation. The merged AT&T/DirecTV would result in a company to rival Comcast (CMCSA) after its Time Warner Cable (TWX) acquisition.
The deal would allow AT&T the chance to transform the future of the television and telecommunications industries. DirecTV's price-to-earnings ratio is 16.9, making the stock attractive, especially in light of its expected compound annual earnings growth of 11.3%.
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At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.