It's been over a year since AT&T (T) agreed to acquire DirecTV (DTV) in a transaction worth $67.1 billion. At the time AT&T said it would pay $95 a share for each share of DirecTV -- comprised of $28.50 per share in cash and $66.50 in AT&T stock. But whether the FCC approves the deal or quashes it doesn't matter all that much. I think AT&T will continue to underperform.
AT&T hopes the deal will add a few points of additional growth to the bottom line. Since May 2013, the company has underperformed the S&P 500 substantially. The index is up 32%, while AT&T is down 5% over that period. Over a five-year horizon, T is up just 44% versus 96% for the S&P. (AT&T is part of TheStreet's Dividend Stock Advisor portfolio.)
As approval seems more and more likely, hedge funds have started to add to their AT&T positions. Why? At most, the combination will add a point to revenue growth, which is already anemic. The consensus predicts 1.9% revenue growth this year (year-on-year revenue growth in fiscal 2014 was 4%).
Investors believe the deal will allow AT&T to add as many as 15 million broadband customers within the next four years. But is that realistic? Those 15 million are mostly rural customers of DirecTV. The dealmakers say the company will be able to reach those customers with a combination of technologies, including fiber to the premises and fixed wireless local loop capabilities. Maybe so, but at what cost?
Fiber to the premises costs over $1 million a mile. That could be a costly gamble when hooking up rural customers. I bet most of those customers won't sign up during the first four years, anyway. They are most likely already relatively well served by DSL over fixed telephone lines. And if you read the fine print in the press release, the plan calls for providing those 15 million customers with at least six-megabit connection speeds -- cable and DSL can be faster than that.
Right now, the consensus estimate for the next fiscal year is $135.8 billion in revenue and $2.61 a share, up from $133 billion and $2.56 a share this year. DirecTV has about $34.5 billion in revenue, which is growing between 3% and 4% a year. Once combined, there is likely to be some disruption that will probably bring that growth rate down somewhat. After the merger, DirecTV will make up about a third of revenue growth, but wireline growth has weighed down results for some time. This deal will most likely reduce the drag from the slowdown in the voice business, but I'm skeptical that it will completely offset it.
Back in April during the first quarter conference call, management said it expects projected cost savings from the merger to be $2.5 billion, up from the original $1.6 billion estimate. But higher customer acquisition costs will most likely dog the company over the next few years as the combined entity increases spending on advertising.
Look, I'm skeptical. Over the years I have seen enough of these big mergers fall completely flat. Wall Street loves to push the deals and the "Strong Buy" recommendations, especially when the companies are so large and the fees are so lucrative. But these things rarely work out as described in the companies' slide presentation. I think the management teams of both companies see limited growth opportunities ahead and have decided to merge based on some flimsy synergy thesis.
With a dividend yield over 5%, there isn't much downside risk. But I don't think there is much upside either.