AT&T Could Buy DirecTV – But the Deal Would Not Live Up to the Hype

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The Wall Street Journal reported this week that AT&T Inc. (NYSE: T) could buy DirecTV (Nasdaq: DTV), which could create one of the U.S.'s largest cable providers.

A deal between the two companies would be north of $41 billion, which is DirecTV's current market cap. AT&T has a market cap of more than $185 billion.

AT&T could buy DirecTVDirecTV is the largest satellite TV distributor in the United States with more than 20 million subscribers. AT&T's landline television and Internet service "u-Verse" has approximately 5.7 million subscribers.

The acquisition talks follow February's news that television giant Comcast Corp. (Nasdaq: CMCSA) had struck a deal to acquire Time Warner Cable Inc. (NYSE: TWC). When the deal is finalized, the combined company would boast approximately 30 million subscribers.

According to AT&T officials, the deal between Comcast and Time Warner Cable is what prompted the DirecTV acquisition talks. Instead of expanding into Europe like most expected, the company wants to strengthen its position in the United States, as its competitors grow.

"It's an industry redefining deal from our standpoint," AT&T Chief Executive Randall Stephenson told The Wall Street Journal.

Because of their size, both major deals will likely require approval from the U.S. Department of Justice and the Federal Communications Commission (FCC).

Even though the acquisition of DirecTV will bring approximately 20 million subscribers to AT&T's television customer base, it may not be the best move for T stock and its shareholders...

AT&T (NYSE: T) Could Buy DirecTV - Here's What that Would Mean

First, the deal is reactionary. AT&T officials freely admit that they had international plans, but are sidelining them now so they can keep pace with Comcast stateside.

And while the deal with DirecTV will help AT&T keep pace in terms of television subscribers, Comcast's acquisition of Time Warner Cable looks like the better deal...

The Comcast and Time Warner deal is similarly priced, at $45 billion, but is really about Internet and broadband services. The companies are the two largest cable providers in the United States, and combined, they should control about 50% of what is known as the "triple-play" (video, voice, and Internet) market. Together, the companies should have 33 million broadband connections - about $18 billion in revenue in 2013.

The combined companies will also reportedly benefit from each other's networks, and according to Comcast Vice President David Cohen, that will lead to better network reliability and faster broadband for customers.

The only thing DirecTV will really be bringing to AT&T is its 20 million subscribers. The subscribers will benefit from AT&T's Internet business, something they weren't privy to as DirecTV offers no Internet option.

For AT&T, DirecTV basically just adds revenue, as they can sell Internet packages to DirecTV customers. But simply adding revenue is a business model not all experts agree with.

"Perhaps [bolstering revenue is] enough," Moffett Nathanson analysts wrote in a research note. "But it isn't strategy; if simply buying cash flows is sufficient, AT&T could just as easily buy a pharmaceutical firm. Or a dog racing track."

Others have pointed out that DirecTV wasn't even AT&T's first option. The company had previously entertained the notion of acquiring Vodafone Group Plc (Nasdaq ADR: VOD) and Dish Network Corp. (Nasdaq: DISH).

"It feels to me like strategy by process of elimination - first Vodafone, then Dish, now DirecTV - rather than by a disciplined strategy of acquiring the right set of assets to compete. That is usually a terrible way to build a company," former top-ranked telecommunications analyst at Sanford C. Bernstein & Co. Craig Moffet told CNN. "It could probably be approved, but if you're AT&T, be careful what you wish for."

T stock is up more than 3% in the last week, but the stock is down 5% in the last year. Adding DirecTV should boost the company's bottom line and make it the second-largest cable provider in the country. But being second-best behind the newly merged Comcast/Time Warner wouldn't be as rewarding as AT&T officials hope.

Do you invest in T stock or are you thinking about adding the stock following this news? Let us know on Twitter @moneymorning using #ATT or $T.

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