How much did DIRECTV cost AT&T?

The merger of AT&T and DIRECTV was announced in July 2015 when the telecom giant announced it would acquire a satellite television company for $48.5 billion. Back then, it was one of the most significant mergers that could be seen in the media and tech sector. But what motivated AT&T to spend so much money on the DIRECTV acquisition, and was it worth it in the end? It is now important to disentangle the rationale for the decision, the net financial effect on AT&T, and the extent to which the acquisition accomplished its intended objective.

Why AT&T Bought DIRECTV
The key reason for the acquisition was growth since acquiring DIRECTV would significantly expand its availability. With the acquisition of the largest satellite TV provider in the United States with more than twenty million customers, AT&T was able to expand its market share in the Pay-TV market besides its principal business segments being wireless, wireless, and Broadband. Specifically, there were a few key benefits AT&T sought from purchasing DIRECTV.

• Grow its video subscriber base: AT&T’s video service had only 6 million subscribers as of 2015 while DIRECTV has more than 20 million. Were the two firms to merge, the new establishment would have more than 26 million video subscribers automatically, thus ranking as one of the biggest pay-TV providers in the United States. This additional scale would also enable AT&T to better negotiate with content providers due to the larger customer base.
• Expand distribution capabilities: Thus, AT&T Internet thought that with the acquisition of DIRECTV satellite TV and broadband retail and service capability in remote and rural areas, it could become the integrated video/broadband provider in the United States and potentially cross-sell/bundle AT&T services.
• Enhance ability to compete with cable: Traditional telecommunications firms such as Comcast and Spectrum were quickly improving their video, broadband, and mobile services to serve as combo service providers. Thus, the acquisition of DIRECTV would enable AT&T to aggressively compete against cable by offering integrated video/wireless/wireline solutions.
• Support diversification beyond wireless: The issues in the AT&T core business, especially in the wireless segment, were various, including the fact that the subscriber addition rate was gradually declining due to competition and the maturity of the market. As for the benefits, AT&T would obtain a new market (video) where it expects revenue to decline if it gets approval to acquire DIRECTV.

To wit, the move to converged video, voice, and data packages was already underway, and AT&T believed that acquiring DIRECTV would provide it with the extra video distribution size necessary to make it a convergence market winner.

The COST MAGNITUDE FOR THE DIRECTV ACQUISITION OF AT&T
But just how much did AT&T pay for DIRECTV by the time the deal was consummated in July 2015? The final purchase price was $48.5 billion, which included.

• This amounts to approximately $28.5 billion in cash.
  
• $17.6 billion of the AT&T Corporation’s 1994 stock
  
• DIRECTV had $2.4 billion in debts out of which $348 million was in long-term debts.

This gave a total of $67.50 per share of the DIRECTV stock. Along with AT&T taking over $8 billion of DIRECTV’s debt, the total deal size was roughly $67 billion based on enterprise value.

To part finance this transaction, AT&T offered $17.7 billion of bonds for different tenors, which formed part of the largest bulk corporate bond offerings at that time. Furthermore, in the remaining several quarters after the acquisition was completed, AT&T had some increase in costs related to merger synergies and other customer retaining measures.

Hence between an expensive initial acquisition cost, new debt, and integration costs within over five years that the deal has been sealed, DIRECTV has indeed been a large capital investment that AT&T has taken to complement their partially integrated pay-TV business.

Was the Strategy and the Investment Worth It?
The internal strategic logic of AT&T acquiring DIRECTV was never about acquiring growth at the cost of over-leveraging synergies; rather, it was about solidifying their position of strength with regards to consolidation based on networks that were getting integrated through the combination of video, wireless, and wireline offerings. But over five years after acquisitions, the payoff has been mixed.

DIRECTV video subscriber losses: Contrary to expanding its video subscriber list, currently, its satellite TV customers have eroded by more than 7 million from its optimal 21 million to an existing 13.4 million. Through the competition brought about by broadband streaming, the whole traditional pay TV business has been affected significantly, and dish and satellite TV even more. Hence, the customer base synergies have not been as effective as was envisioned earlier.

STRONG wireless customer adds: AT&T has been able to improve its customer base through wireless subscribers by more than 20 million in the same 2015-2020. It can therefore clearly go on to seek more chances to promote video and broadband services amongst a rising mobile user base even if DIRECT satellite connections in particular are falling.

Competitive pressure remains: Yet while becoming the largest traditional TV provider for a time through the acquisition of DIRECTV, AT&T has faced more relentless long-term competitive pressures from Comcast, Charter, and Cox, who have converged around bundled broadband and over-the-top video. And therefore while AT&T had seen fully bridging the gap to cable from a market leadership position as this deal the actuality has not been realized yet.

In other words, the inbuilt directional change from satellite TV to IPTV and streaming was not properly assessed when this deal was negotiated in 2014 and finalized in 2015. Therefore, even though DIRECT and AT&T have managed to achieve a reasonable level of integration and an increase in mobility of the customers, maintaining a leading position in the satellite video industry has not been easy. And with the price for this mega-deal reaching as much as $67 billion, it is quite evident that AT&T is still struggling to get the ROI on this one. However, considering that these assets have been in its possession for more than 5-6 years that it can leverage in this convergence strategy, AT&T’s management team has done as well as outside market conditions permitted.

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