DirecTV's (DTV) stock was up 1.4 percent this morning on rumors of a potential acquisition by AT&T (T). Not surprising, as a deal would likely bring a premium for shareholders, with the price rumored to be $50 billion. That would translate into a price in the low- to mid-$90s, or a 20 percent premium over the pre-rumors share price. Not bad when the 12-month low was just over $57.
But if it's clear what the DirecTV shareholders would get, the next question is what the deal offers to AT&T. The answer: An important door into a critical area of telecommunications where it is a minor player.
The attraction of DirecTV for the second largest wireless carrier in the country after Verizon (VZ) has nothing to do with broadband service. DirecTV spun off its satellite broadband business years ago. This is pure television entertainment.
And pure business. According to the National Cable and Telecommunications Association, 85 percent of the country has pay TV, compared to 70 percent in 1992. Even with all the talk of cord cutting and people taking to the Internet to stream videos, pay TV is a big industry.
Cable represents 54 percent of the pay TV market. Satellite is 34 percent. Telco, which includes AT&T, has a total of 11 percent. AT&T is a small player on the television scene.
Although the telco percentage has grown over the years, it doesn't offer the growth that AT&T would like, and the company feels the need for more economic heft. That's why being refused permission to buy T-Mobile was such a blow. The regulatory veto left Verizon ahead. Although the U.S. wireless market is not completely saturated, it is a mature industry.
Pay television is also a mature industry and one where the number of customers has begun to shrink. But that still leaves an enormous market, and one where AT&T would like to play a larger role as a way to grow revenue and also obtain cross-selling opportunities. A DirecTV acquisition could be a good tool to address both goals.