NEW YORK (TheStreet) -- DirecTV (DTV - Get Report) shares got a slight lift on Thursday following its deal with the National Football League to extend as well as somewhat expand its much-coveted NFL Sunday Ticket agreement.
The multi-year deal, announced on Wednesday, calls for DirecTV to continue to own exclusive rights to carry NFL Sunday Ticket and its package of Sunday afternoon out-of-market games. The agreement also expands DirecTV's rights to stream NFL Sunday Ticket live on mobile devices and via broadband, among other things. While terms of the deal weren't disclosed by the two parties, media reports estimate the deal is worth $12 billion ($1.5 billion per year over eight years).
The deal is significant because it allows the merger between AT&T (T - Get Report) and DirecTV to go through. AT&T had a clause in the merger agreement that if DirecTV was not successful in extending its long-time NFL Sunday Ticket agreement with the NFL then it might walk away from the $49 billion merger.
DirecTV shares were trading up 1% to $87.47 on Thursday. Here's what analysts said about the deal.
Greg Miller, Canaccord Genuity (Hold; $95 PT)
Having already received approval from the Department of Justice, the renewal of Sunday Ticket was one of the last major hurdles to clear in order to complete the pending merger with AT&T (HOLD). In our view, though exact concessions sought from AT&T remain to be seen, the FCC - the final primary party involved in the merger review - will likely approve the merger. As a result, we reiterate our HOLD rating on DTV.
We note the value of this deal -- though not an apples-to-apples comparison given the new streaming rights granted - represents a roughly 50% increase over the previous deal on a per-year basis. With Suddenlink and other smaller cable operators balking at increased carriage fees from Viacom (VIA.B) , we think this deal highlights the diverging values of live, premium content (e.g. sports) and scripted.
In our view, this cost is likely consistent with investor expectations, and perhaps better than some feared given the importance of the deal to the successful completion of the AT&T deal. Based on the reports, we believe annual escalators are roughly mid-single digits (closer to 6%) over the 8-year term, with escalators likely higher during the fixed term of the contract. The reports would also imply a starting point of roughly $1.2bn, representing an estimated mid- to high-single digit step up from the current season. Given the presumed longer contract length, it is likely that the average escalator of the new deal is below that of the prior deal.
Given management's confident tone following the proposed deal with AT&T, we believe most investors anticipated an extension to the exclusive arrangement. Nevertheless, the absence of a deal remained an overhang, given AT&T's ability to walk away from the merger should DirecTV fail to reach a new agreement or if terms were not within certain parameters. As a result, we would expect the deal spread (currently 9.7%) to narrow. Notably, we do not believe the deal contains any language pertaining to AT&T's ability to further leverage the content should it successfully close the DirecTV transaction. Post the transaction close, existing U-Verse subscribers wanting the NFL package would have to switch to a satellite set-top.
Kannan Venkateshwar, Barclays (Equal Weight; $95 PT)
The extension of the deal between NFL and DTV should not be a surprise to anybody. As we have noted in the past, the NFL needs DTV as much as DTV needs Sunday Ticket. However, what is interesting to us is not just what is included in the deal but what is not, especially in the context of the announced deal between AT&T and DTV.
Given Verizon's ability to stream in-market games to smartphones as a result of VZ's $250mm annual deal with the NFL, it is interesting that the rights acquired by DTV do not seem to include a similar set of rights for out-of-market games. Consequently, if AT&T wants to replicate the VZ offering for out-of-market games, it will now need to negotiate separately with the NFL.
Marci Ryvicker, Wells Fargo Securities (Market Perform)
The renewal is good news as it relates to the acquisition by T. Recall, that a failure to renew the NFL Sunday Ticket package would have allowed AT&T to scrap its plans to acquire DTV, with no breakup fee. Yesterday's news removes this possibility, which is good for DTV in our view.
Bottom line: Though expected, we view yesterday's announcement as an important positive given it removes one of the perceived ''risks'' to DTV's sale to AT&T.
"We rate DIRECTV (DTV) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its solid stock price performance, growth in earnings per share and increase in net income. However, as a counter to these strengths, we find that we feel that the company's cash flow from its operations has been weak overall."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Powered by its strong earnings growth of 34.74% and other important driving factors, this stock has surged by 44.36% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, our hold rating indicates that we do not recommend additional investment in this stock despite its gains in the past year.
- DIRECTV has improved earnings per share by 34.7% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, DIRECTV increased its bottom line by earning $5.19 versus $4.61 in the prior year. This year, the market expects an improvement in earnings ($5.87 versus $5.19).
- 48.46% is the gross profit margin for DIRECTV which we consider to be strong. Regardless of DTV's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 9.93% trails the industry average.
- Net operating cash flow has remained constant at $1,474.00 million with no significant change when compared to the same quarter last year. This quarter, DIRECTV's cash flow growth rate has remained relatively unchanged and is slightly below the industry average.
- You can view the full analysis from the report here: DTV Ratings Report
-Written by Laurie Kulikowski in New York.