Few industries have been as deeply embroiled in merger mania as the telecommunications industry, particularly after AT&T’s $48.5 billion bid for DirecTV.
It follows Comcast‘s $45 billion offer for Time Warner Cable, which if completed would create a national colossus in the cable-television and high-speed network sector.
How will others in the industry respond? Perhaps with even more consolidation.
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A bigger and more emboldened AT&T may have repercussions for Sprint.
The cellphone-service operator’s majority owner, Japanese telecom Softbank, has long coveted a deal with Bellevue-based T-Mobile to gain much-needed scale.
Yet a tie-up of the two has drawn hints of vocal opposition from several officials at the Federal Communications Commission, who have worried that a merger of the third- and fourth-biggest players in the industry would constitute an unacceptable level of consolidation.
Sprint and SoftBank have argued not so subtly that acquiring T-Mobile would create more competition, blunting the power of AT&T and Verizon.
Here’s what Michael Rollins, an analyst with Citigroup, had to say:
“The increase in large-scale M&A with AT&T’s pending acquisition of DirecTV could give Sprint and T-Mobile the opportunity to propose that the market definition under which competition is measured should be broader than wireless and try to reduce the concentration assessment under a traditional and relatively narrow definition.”
They may also feel additional pressure to move soon, not willing to put a sure-to-be contested merger before the FCC after it has already weighed — and potentially approved — two other proposed consolidation bids.
AT&T‘s acquisition most clearly affects the country’s other major satellite-television provider.
Dish Chairman Charles Ergen has made no secret that deals were an important part of his strategy, whether they be a foiled attempt at buying Sprint or a withdrawn bid to acquire the bankrupt broadband wireless provider LightSquared.
And in recent months, news reports contended that Ergen was interested in pursuing deals either for T-Mobile or for DirecTV itself.
At the same time, analysts had long speculated Dish might make an attractive acquisition target for AT&T.
Starting last week, however, Ergen began to cast some doubt that his company would be able to pursue some of those deals. During the satellite-TV operator’s earnings call last week, he conceded Dish doesn’t have the same sort of financial firepower that bigger competitors do.
And while a merger with DirecTV would make sense, he was not willing to pay what he described as a “lofty” valuation.
“We don’t have the kind of money to go outbid Sprint for T-Mobile or outbid AT&T for DirecTV,” Ergen said.
While AT&T had weighed a potential pursuit of Dish, the company and its advisers ultimately concluded that such a deal would be for the wrong satellite-TV provider, a person briefed on the matter said Sunday.
The wireless spectrum Dish owns — long cited as one of its biggest strengths — could hamper AT&T’s own plans to bid for additional network capacity in a government auction.
And Ergen’s stated desire to become a broadband-service provider could have aroused greater opposition to a merger with AT&T, in a way that buying a television-only company like DirecTV might.
Ergen left analysts with a hint of his strategy, though he didn’t elaborate on whether it was dictated by choice or strategy.
From a transcript of the call by Standard & Poor’s Capital IQ:
“I’m not that smart, but when I used to play poker and everybody was throwing chips and betting crazy on the table and I had really good cards, I always felt it was better just to sit back and watch them go at it, right? And every time they went at it, I’d learned something. And they — and as I sat back, they didn’t learn anything about what I had. And I learned to trust my cards. And I wasn’t a very good poker player, but when a bunch of drunken fools were throwing money around, occasionally I was able to pick up a pot at the end of the day.”
Some analysts believe it’s still too early to count Dish out. Citigroup’s Rollins wrote in a note Monday that Ergen might yet emerge as a bidder, in part because its outlook as a stand-alone company looks so unappealing.
And Verizon may ultimately end up courting the satellite-TV operator, which could help bolster the telecommunications giant’s video offerings in the same way DirecTV would help out AT&T’s.
From Rollins’ report:
“We believe Verizon could respond by making a bid for Dish’s spectrum or all of DISH, with the latter providing scale in the video business and a path to leverage its investments in IPTV and content delivery networks to evolve the Dish video biz into a national over-the-top (OTT) video provider.”
Other media companies
The DirecTV acquisition may also spur deal making in other areas. Richard Greenfield, an analyst with BTIG, said Monday that consolidation on one side of the content creation and distribution axis tends to beget acquisitions on the other side as well. With both Comcast and AT&T moving to strengthen their hands, media companies may again follow up.
Perhaps Time Warner or CBS may rev up their own deal engines. Or the Walt Disney Co. may feel emboldened to go after a complementary target like Discovery Communications.
“ … Especially if we see more distribution consolidation, I think you eventually end up with programming consolidation as well,” Greenfield said. “It just seems like there are logical combinations.”