In one of the worst kept secrets in the pay TV industry, AT&T has agreed to acquire satellite giant DirecTV in a deal worth about $48.5 billion ($95 per share) that will create a solid No. 2 with about 26 million TV customers across the country.
The purchase price implies a total equity value of $48.5 billion and a total transaction value of $67.1 billion, including DirecTV's net debt, the companies said in the announcement made Sunday.
Reports that AT&T had approached DirecTV surfaced on May 1, but talks apparently heated up quickly, with DirecTV hiring Goldman Sachs to advise it on a possible deal.
"This is a unique opportunity that will redefine the video entertainment industry and create a company able to offer new bundles and deliver content to consumers across multiple screens – mobile devices, TVs, laptops, cars and even airplanes. At the same time, it creates immediate and long-term value for our shareholders,” said Randall Stephenson, AT&T chairman and CEO, in a statement. “DirecTV is the best option for us because they have the premier brand in pay TV, the best content relationships, and a fast-growing Latin American business. DirecTV is a great fit with AT&T and together we’ll be able to enhance innovation and provide customers new competitive choices for what they want in mobile, video and broadband services. We look forward to welcoming DirecTV’s talented people to the AT&T family.”
The deal is expected to close in 12 months.
While the deal will create a more formidable rival to Comcast/Time Warner Cable, which will have about 30 million customers after its $69 billion merger is completed by the end of the year, not everyone is convinced combining AT&T and DirecTV will solve all the companies' problems. While the deal does give DirecTV a broadband product -- U-verse-- it is only available in 25% of the country. And though DirecTV is the second largest pay-TV provider in the country, its growth has been slowing -- it added just 12,000 net new customers in the first quarter.
As part of the deal, AT&T said it would expand its U-verse broadband service to 11 million homes. The deal will have no impact on the phone giant's participation in the upcoming wireless spectrum auctions and AT&T said it will divest its Latin American wireless operation -- American Movil -- while retaining DirecTV Latin America.
“This compelling and complementary combination will bring significant benefits to all consumers, shareholders and DirecTV employees,” said Mike White, CEO of DirecTV, in a statement. "U.S. consumers will have access to a more competitive bundle; shareholders will benefit from the enhanced value of the combined company; and employees will have the advantage of being part of a stronger, more competitive company, well positioned to meet the evolving video and broadband needs of the 21st century marketplace.”
DirecTV shareholders will receive $95 per share under the terms of the merger, comprised of $28.50 per share in cash and $66.50 per share in AT&T stock. The stock portion will be subject to a collar such that DirecTV shareholders will receive 1.905 AT&T shares if AT&T stock price is below $34.90 at closing and 1.724 AT&T shares if AT&T stock price is above $38.58 at closing. If AT&T stock price at closing is between $34.90 and $38.58, DirecTV shareholders will receive a number of shares between 1.724 and 1.905, equal to $66.50 in value.
The purchase price implies a total equity value of $48.5 billion and a total transaction value of $67.1 billion, including DirecTV's net debt. This transaction implies an adjusted enterprise value multiple of 7.7 times DirecTV’s 2014 estimated EBITDA. Post-transaction, DirecTV shareholders will own between 14.5% and 15.8% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding today.
Goldman, Sachs & Co. and BofA Merrill Lynch acted as financial advisers to DirecTV and Weil, Gotshal & Manges LLP, Jones Day and Wiltshire & Grannis LLP served as legal advisers.
DirecTV and AT&T will hold a joint conference call with analysts on the deal Monday at 8:30 a.m. ET.