After a few weeks of rumors, on Sunday AT&T (T) confirmed its $95/share offer for DirecTV (DTV). The deal will be part stock and part cash, and is expected to close within 12 months if the deal meets regulatory approval.
Such a large acquisition should have a significant impact on both of these companies as well as their competitors. Though it will likely take years to measure the complete impact of this acquisition, here are my thoughts on the winners and losers from this deal.
Winner: DirecTV Shareholders
IÂ recommended investors buy DirecTVÂ back in September when the stock was trading at ~$59/share. At ~$95/share, shareholders are getting a good price for the stock, and a great return if they bought last fall. While DTV generates great free cash flow and has strong growth opportunities in Latin America, satellite TV subscribers in the U.S. have been in decline. For DTV to grow profits significantly in the future, it needs to be able to bundle its services with broadband internet, which T can deliver.
T is paying a 22% premium to where DTV stock was before the first news of the merger broke. That’s a fairly significant premium, and while I think DTV might end up justifying that investment (more on that soon enough), $95/share is probably higher than the stock would reasonably be valued at on its own, as evidenced by the fact that the stock currently trades ~$10 lower than that price on fears that the merger won’t be approved or that T’s stock will drop to in reaction to the overpayment.
Specifically, $95/share implies that the company will grow after-tax profit (NOPAT) by 4% compounded annually for eight years. 4% NOPAT growth for eight years is not an especially high expectation, but considering the increasing number of people abandoning TV services altogether it might have been difficult for DTV to hit on its own. DTV shareholders should cash in on the opportunity to get such a good price for their shares.
