AT&T and DirecTV Must Get on the Same Team

NEW YORK (TheStreet) -- This has been a good year for owners of DirecTV (DTV) stock thanks, in part, to AT&T (T). Shares of DTV popped as high as $89.46 on May 13 when rumors of a takeover surfaced. That was a 30% spike since the beginning of 2014.

Yet, after AT&T's $95-a-share cash and stock offer to acquire DirecTV, shares sold off on humongous trading volume. By Tuesday May 20 shares plunged as low as $82.84, down almost 4% from Friday's closing price. DTV shares closed Tuesday at $83, up 20% for the year to date.

Why does AT&T want DirecTV so badly? It might have something to do with competing against Comcast (CMCSA), which wants to buy Time Warner Cable (TWC). Or it might have something to do with the National Football League's "Sunday Ticket" package, the biggest thing DirecTv has going for it. Without the NFL, why bother?

And why didn't shares of DTV reflect the buyout price on the day the deal was announced? My take on the first question is that AT&T needs more cash flow to sustain its nearly $10 billion annual dividend payout. AT&T shares closed at $35.50, up just about 1% for the year to date.

The behemoth telecom unnerved many analysts and investors during its first-quarter conference call when it estimated its free cash flow at about $11 billion during fiscal 2014. That number was after capital expenditures. That means AT&T would need to use nearly 90% of free cash just to pay its dividend.

As of March 31 DirecTV reported about $2.6 billion in trailing 12-month (TTM) levered free cash flow. Its TTM operating cash flow was $6.45 billion and its total cash was just over $3 billion according to Yahoo! Finance. This acquired cash flow would help AT&T to continue to pay its hefty 5.18% dividend.

Why shares of DirecTV didn't rally near the takeover bid price is the big question. The stock's retreat on heavy volume was a classic "sell the news" reaction. Let's take a closer look at a one-year price chart of DTV to look for clues.

DTV Chart
data by YCharts

The quarterly year-over-year revenue growth (orange line) and the diluted quarterly earnings per share (EPS) metrics fell hard in the first quarter of 2014. Perhaps this intimates DirecTV needs the AT&T acquisition as an exit strategy for its shareholders?

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