AT&T Will Benefit from DirecTV Acquistion

AT&T, Inc. (NYSE: T)

Technology; Telecom Services; BUY

Due to the increase demand for smart phones and tablets, wireless communication industry is expected to grow. This growth will spur many opportunities for wireless communication players especially through data consumption. AT&T has positioned itself well amid DirecTV acquisition. It will bring-in tremendous benefits in terms of lower costs and increased market share. The main challenge for the company will be the falling demand for its wired communication services. AT&T will need to divert its resources from the legacy voice services to other profitable sections in order to keep its competitive position intact. Overall, strong financial position and a dominating share in the U.S. wireless communication market along with the recent acquisition makes AT&T a value adding investment.

Thesis

Demand for telecommunication will be driven by the market for cellular products including smart-phones and tablets. IDC predicts that the market for U.S. smart-phones will grow in the future but at a slower rate. The firm predicts a CAGR of 5.3% between 2013-2018. Reuters predicts a rising trend for U.S mobile data traffic by 2018 as more people shifts from laptops and PCs to smart-phones and tablets.

AT&T is a market leader along with Verizon in the wireless communications market. Currently, the company has captured 31.2% while Verizon controls 33.7% of the total wireless subscribers base. A combined market share of nearly 65% leaves the two company in a duopoly position which enable them to control prices and margins. Due to AT&T’s significant position in the market, we believe the company is in a great strategic position to turn future opportunities from growth in smart-phone shipments and mobile data traffic, into profits.

AT&T recently completed its acquisition of DIRECTV, a multinational pay TV provider. Through this combination, the company intends to capture the video entertainment market by providing efficient video delivery platform to millions of additional households through its mobile and high speed internet service. Management expects cost synergies will exceed $1.6 billion by end of the third year of closing the deal. The acquisition will also allows the company to penetrate into Latin America since DIRECTV has a leading presence their. The acquisition of Nextel Mexico and GSF Telecom further allows AT&T to extend its subscriber base, regionally, by capturing more Latin America consumers and businesses. AT&T’s recent acquisitive strategy focuses on spreading its coverage to more than 400 million consumers and business in Mexico and the United States.

The demand in the wire-line telecommunication sector is dropping, especially on the consumer side, due to the shift of consumers to wireless communication. A report by Ibisworld states that with increasing number of households using wireless phones, revenue from fixed local and long distance services is expected to decline over the next 5 years. IDC believes VoIP and broadband services will stay in demand but these gains will not be enough to overcome revenue losses from fixed voice services. Considering wireline products and services form 45% of the company’s revenue, falling trends in the wireline products, especially from fixed voice services, will have a negative effect on AT&T’s future earnings. The popularity of 3G and 4G can cannibalize the company's wire-line internet business.

AT&T faces stiff competition from its competitors Verizon and T-Mobile. T-Mobile's un-carrier strategy is leading to prices wars which will put pressure on industry profits. The recent launch of T-Mobile’s simple choice plan with mobiles without border will provide more cost efficiency for consumers compared to options from AT&T, Sprint and Verzion. Furthermore, T-Mobile’s Jump on demand phone leasing plan for Apple users bodes ill for competition as t-Mobile tends to attract maximum iPhone users for the next iteration of the iPhone. Further, AT&T is trading at a premium to its larger counter part, Verizon.

A slightly different version with a valuation focus appeared on Prudena.