AT&T and DirecTV: Turn On, Tune In, Stand By

AT&T will soon get a financial shot in the arm from becoming a satellite-TV provider. But the long-term health benefits for the telecommunications company from owning DirecTV remain unclear. AT&T’s acquisition of DirecTV is expected to close very soon, and the stock has risen in anticipation, including a 3 percent jump June 23 on the back of analyst upgrades. The shares likely have more room to climb, as most Wall Street analysts have yet to raise their estimates. Those who have envisage 2016 earnings per share coming in 8 percent to 10 percent higher than the current consensus figure suggests. Higher earnings would also mean more coverage for AT&T’s all-important dividend.

And DirecTV may offer a counterweight to the challenges at AT&T’s wireless business, which has been battered by a price war. The question is whether this justifies DirecTV’s $64 billion purchase price, including net debt and multiple of 7.6 times 2015 earnings before interest, taxes, depreciation and amortization. That is only slightly below Comcast ’s multiple of 8.1 times-- despite Comcast’s greater scale and broadband offering -- and above AT&T’s 6.8 times. The risk around DirecTV’s long-term value boils down to AT&T’s ability to navigate the transition between traditional TV viewing and TV viewed over the Internet. This is a particularly pressing question in light of a boatload of evidence suggesting the pay-TV industry is declining, albeit slowly for now. And while DirecTV has continued to attract new subscribers, rising programming costs have kept pressure on its profit margin. One key question is whether AT&T can successfully grow by offering new bundles of video, broadband and mobile services.