What's driving a possible merger of AT&T and DirecTV?

Shares of DirecTV (DTV), the second-largest provider of satellite television service, rose almost 6 percent after the Wall Street Journal reported that AT&T (T) had approached the company about a "possible acquisition" to counter the competitive threat of the planned Comcast (CMCSA) and Time Warner Cable (TWC) merger.

The status of the buyout talks, which began after the Comcast-Time Warner Cable deal was announced in February, isn't clear. The Journal wasn't sure if the two companies had begun negotiations. Neither company would comment Thursday on the Journal story. Shares of AT&T, the second-largest wireless provider, were trading down slightly Thursday. Other buyers for DirecTV could emerge.

Should AT&T and DirecTV join forces, the combined company would have 26 million customers, giving it about the same reach as a merged Comcast and Time Warner Cable. Like Comcast, AT&T would also have to convince the Federal Communications Commission that the acquisition, which would top $40 billion, is in the best interest of the public. Some industry critics have their doubts.

"We would have concerns about it," said Michael Weinberg, vice president at Public Knowledge, a think tank that has been a vocal critic of the Comcast-Time Warner Cable deal. "Where AT&T has its U-Verse television service you would lose that element of competition between AT&T and DirecTV... A lot of consolidation doesn't usually breed more competition."

There have been rumors about DirecTV merging with rival Dish Network (DISH) for quite a while. Dish Chairman Charlie Ergen reportedly approached his rival at DirecTV, Michael White, about a merger, according to Bloomberg News. It's unclear if these talks went anywhere. Regulators blocked a 2002 proposed merger of the two companies and analysts said they were skeptical that a new merger would fare any better.

About 251,000 customers quit satellite and cable companies in 2013 on a net basis, the first decline ever recorded, according to market researcher SNL Kagan. Television is moving online. Critics of the Comcast-Time Warner Cable deal are worried about its impact on the broadband market.

As for AT&T, its growth prospects in broadband and other markets are limited without DirecTV. "If they can get DirecTV, that gives them an entirely new slice of the pie," Kagan said.

During the most recent quarter, AT&T, which is facing heightened competition from T-Mobile US (TMUS), added 625,000 monthly customers, three times less than its smaller rival. DirecTV added 93,000 U.S. customers, which was 10 percent below the year-earlier period, though it was above analysts' forecasts. However, as the Journal noted, customer growth has fallen every year since 2010.

"Every company has blanks and this fills in the blanks for both companies," says Jeff Kagan, an independent telecommunications analyst, in an interview. "We are coming into a new wave of consolidation. ... All of a sudden we can have a whole new dance card."

Among the other deals that might materialize if the AT&T-DirecTV deal materializes is the much-hyped combination of Sprint (S) and T-Mobile. Number two wireless player Verizon Communications (VZ) might also come under pressure to do a deal as will Dish Network.

Companies such as AT&T and Comcast have businesses such as wireline cable and wireline communications that are regional in nature and therefore have limited growth prospects. Adding DirecTV, which has more than 20 million customers, would increase AT&T's national footprint much like Time Warner Cable could do for Comcast.

"The model is Comcast," said Michael Pachter, an analyst at Wedbush Morgan, in an interview, adding that the company would likely want to convert DirecTV's customers to "some kind of AT&T service."

Although it would be taking on a huge risk by acquiring DirecTV, its one that AT&T may need to take given the huge changes coming to the media and telecommunications industries.

  • Jonathan Berr

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