Why Consumers Should Care about the $50 Billion AT&T-DirecTV Merger

Aaron Pressman
Technology Reporter
May 19, 2014

Couch potatoes may get even more options to watch television over the Internet if regulators approve AT&T’s acquisition of DirecTV. But they may have to pay more for it too.

AT&T says it is buying the satellite TV provider for $48.5 billion in cash and stock to quadruple its U.S. video subscriber rolls and bolster its Internet TV offerings. But consumer groups say this kind of consolidation could also lead to price increases and weaker Internet video offerings overall.

DirecTV has about 20 million U.S. subscribers and 18 million abroad versus AT&T’s 5.7 million U-Verse television subscribers in the United States.

Companies that create television programming, such as Walt Disney and Viacom, have lately had the upper hand over video distributors like AT&T and DirecTV. They’ve steadily raised prices to grab a growing share of the profits in the $110 billion U.S. pay television market.

Now comes the countervailing reaction, as distributors try to bulk up and gain greater bargaining power with the programmers. That’s part of the rationale for Comcast’s (CMCSA) $45 billion takeover of Time Warner Cable (TWC) as well as the AT&T-DirecTV combination.

Related: Comcast and Time Warner Cable merger: What it means for consumers

AT&T will have about 26 million U.S. subscribers if it merges with DirecTV –– close to the 30 million total Comcast will have if its acquisition of Time Warner Cable is approved.

AT&T says the bigger subscriber base will help support its efforts to offer more programming over broadband Internet connections. That could help increase competition against similar services offered by cable operators like Comcast as well as pure Internet services like Netflix (NFLX) and Hulu. And AT&T promised as part of the deal to bring high-speed Internet connections to 15 million people in mostly rural areas, increasing the potential audience for Internet TV service.

DirecTV also has an exclusive deal to carry the complete slate of National Football League games on Sundays, which could eventually be extended to AT&T subscribers or Internet viewers. The package is so desirable that AT&T has the right to call off the entire merger if DirecTV loses the football rights.

Consumer groups, however, say they are appalled by the degree of control AT&T and Comcast may have over their customers if regulators approve both mega-deals.  Prices increases for cable televisions service have outstripped inflation for years, they note.

“The rush is on for some of the biggest industry players to get even bigger, with consumers left on the losing end,” Delara Derakhshani, policy counsel for Consumers Union, said in a statement. “You can’t justify AT&T buying DirecTV by pointing at Comcast’s grab for Time Warner, because neither one is a good deal for consumers.”

AT&T promised to maintain DirecTV’s standalone TV service offering, even though it competes with U-Verse in some areas, and charge the same price nationwide.

AT&T also has financial reasons to pursue the deal. DirecTV is a cash cow, producing $2.6 billion in free cash flow last year. That will give AT&T’s own expected cash flow of $11 billion this year a solid boost – and a much needed one as AT&T pays out almost $10 billion in annual dividends, analysts say. AT&T will have to take on $19 billion of DirecTV debt as part of the deal.

Still, DirecTV shareholders appear to be getting a fairly slim premium in the deal. AT&T’s offer amounts to $95 a share, which includes $28.50 in cash and the remainder in stock. That’s only 10% above Friday’s closing price and about 25% over the share price over the past few months.

But merger talk has been swirling around the satellite TV service for ages, bolstering the stock price that otherwise would be much lower, analysts said.

Regulators have yet to weigh in on either deal. So investors will have to wait, possibly quite some time, before they get to cash in.

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