By Thomas Gryta and Dana Cimilluca
DirecTV is working with advisers including Goldman Sachs Group
Inc. to evaluate a possible combination with AT&T Inc., people
familiar with the matter said, a sign the satellite broadcaster is
seriously considering a deal with the telecom giant.
The two companies are in talks following an approach from
AT&T to acquire DirecTV, people familiar with the matter said.
A deal would create a pay-television giant that would serve more
than 25 million subscribers and rival a combined Comcast Corp. and
Time Warner Cable Inc.
On a conference call with analysts Tuesday, DirecTV Chief
Executive Mike White noted recent media reports speculating "about
possible transactions that might involve DirecTV." He said the
reports weren't "based on official sources of information and we
don't view it as productive to speculate about alternative business
combinations which may or may not occur." He said he wouldn't
comment further or take questions on the reports.
DirecTV stock, which had fluctuated last week after The Wall
Street Journal reported the approach by AT&T, has rallied in
the past two days. On Wednesday the stock was up 8%, having risen
2.4% Tuesday. At its current price of $88.25 a share, DirecTV has a
market capitalization of about $45 billion.
Mr. White and AT&T executives have each said previously that
Comcast's $45 billion deal to acquire Time Warner Cable has changed
the competitive landscape, and both companies have said they are
looking at how to strengthen their positions.
A deal with DirecTV would bolster AT&T's ability to
distribute movies and television shows at a time when it
increasingly sees video as central to its future. The telecom
company is pursuing a dual approach, expanding its U-verse pay-TV
service while also building over-the-top services to deliver video
content over broadband and wireless connections.
The combined company would have annual revenue of about $160
billion and may be better positioned to negotiate for the needed
rights to TV shows and movies.
For AT&T, a deal with DirecTV could deliver significant
financial benefits at a time when Wall Street is concerned about
the amount of cash needed to fund AT&T's dividend. UBS analyst
John Hodulik said in a recent research note that the deal would
provide AT&T the free cash flow needed to pay its dividend for
the next decade.
"The deal would provide financial and operational synergies that
appear to fit AT&T's historic game plan," Mr. Hodulik
wrote.
The world has become a much tougher place for DirecTV in recent
years as subscriber growth has slowed sharply while programming
costs are rising and cheap online video alternatives are
multiplying.
Satellite rival Dish Network Corp. has invested billions of
dollars in trying to diversify into wireless broadband and launch
its own online video service. DirecTV, in contrast, has spent $29.7
billion on buying back its own stock in the past eight years,
according to regulatory filings.
As competitors move to gain scale and offer bigger bundles of
service, the chief weakness of satellite TV becomes apparent: the
lack of an Internet-access broadband service competitive with cable
and phone companies.
Ryan Knutson and Martin Peers contributed to this article.
Write to Thomas Gryta at thomas.gryta@wsj.com and Dana Cimilluca
at dana.cimilluca@wsj.com
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