Moody's Sees Thorny AT&T Deal with DIRECTV

NEW YORK (TheStreet) - Rating agency Moody's said on Tuesday it believes AT&T (T) will face a tougher review process in its efforts to buy DIRECTV (DTV), when compared to Comcast's (CMCSA) controversial merger attempt with Time Warner Cable (TWC). Still, Moody's believes the odds are both mega-deals will pass regulatory reviews.

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In a ratings note, Moody's said it sees a 75% likelihood AT&T receives regulatory approval for its merger effort with DIRECTV, whereas Comcast's odds of success in buying Time Warner Cable are greater than 90%.

That may sound bizarre to the ordinary cable customer.

Comcast and Time Warner Cable are the two biggest cable and Internet service providers in the U.S, whereas AT&T is a telecom giant and DIRECTV is a market leader in satellite TV in the U.S. and Latin America. The hitch is that Comcast and Time Warner Cable don't overlap in any of their respective markets, while AT&T's U-verse offering overlaps with DIRECTV in about 25% of the country.

That overlap isn't expected to be a dealbreaker. AT&T has offered to set prices for DIRECTV at an equivalent national package for three years, while freezing U-verse broadband prices for three years, potentially diffusing pushback from regulators. AT&T also has committed to building out service for 15 million homes in rural and underserved markets as a means to placate regulators.

If Moody's is confident AT&T will ultimately win DIRECTV, the ratings agency is less than sold on the merits of the deal. "AT&T's DIRECTV acquisition lacks strategic clarity," Moody's said in a note that put the telecom giant for a review for a downgrade from its A3 rating.

In a telephone interview, Neil Begley, a senior vice president at Moody's said AT&T's acquisition of DIRECTV may help alleviate video loads on U-verse, however, the telecom firm will need to continue investing in its wireline footprint if the company wants to expand upon its 25% Internet footprint.

Simply put, AT&T's wireline network and DIRECTV's satellite network can't be physically integrated in the same manner as Comcast and Time Warner Cable. That means AT&T's network will require more investment, especially since the company will need to replace its copper-wire infrastructure if it wants to remain competitive.

Once investors factor in those costs, in addition to the $48.5 billion pricetag for DIRECTV, the deal may come off as burdensome to shareholders. DIRECTV comes with significant debt, and the stock component of AT&T's offer effectively means it will be spending added cash flow on dividend payments.

Even if AT&T meets its $1.6 billion guidance of deal-related synergies, Begley, the Moody's SVP, questions whether DIRECTV will increase the company's free cash flow enough to handle a debt load that would approach $100 billion.

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-- Written by Antoine Gara in New York.

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