Pending the approval for its merger with AT&T, the shares of this satellite provider were recently downgraded to Hold, by Wunderlich, to Neutral, by Macquarie and our contributor has removed them from his Buy list.
DirecTV (DTV)
from Dow Theory Forecasts
DirecTV (DTV) agreed to be acquired by AT&T for $48.5 billion, or $95 per share, with cash of $28.50 per share. Including the assumption of debt, the purchase will cost $67.1 billion. DirecTV investors stand to receive $66.50 per share in AT&T stock as long as AT&T shares trade between $34.90 and $38.58. DirecTV shareholders will receive 1.905 shares of AT&T per DirecTV share if AT&T’s price is below the range at closing and 1.724 shares if the deal closes with AT&T’s price above the range. AT&T expects to complete the deal within a year.
DirecTV shares fell on the announcement and trade well below AT&T’s offer price, as investors handicap hurdles that could jeopardize the deal. AT&T and DirecTV may have more overlap in geographic markets than Comcast and Time Warner. Regulatory pressure squashed AT&T’s $39 billion bid to acquire T-Mobile USA in 2011, which would have combined the country’s second- and fourth-largest wireless carriers.
AT&T paid a $3 billion breakup fee for that failed deal; the DirecTV pact features no breakup fee. Moreover, AT&T can back out of the deal if DirecTV fails to renew its contract for the popular NFL Sunday Ticket.
We can’t fault investors for sticking with DirecTV if they are confident regulators will ultimately approve the deal, as the stock trades at a 12% discount to the value implied by AT&T’s bid.
However, we are removing the stock from the Focus, Buy, and Long-Term Buy lists. We confine these lists to our best capital-returns picks for the next 12 months, or the next 24 to 48 months for the Long-Term Buy List.
Given the deal’s inherent risks, DirecTV shares will likely trade on regulatory speculation, rather than fundamentals, in the coming year. And we think we can find better stocks. DirecTV is now rated A (above average), as is AT&T.
Richard J. Moroney, CFA, Dow Theory Forecasts, www.dowtheory.com, 800-233-5922, May 26, 2014