AT&T to buy DIRECTV for $48.5b

Analysts: Deal could result in potential monitoring synergies, bundling opportunities
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Monday, May 19, 2014

DALLAS, Texas and EL SEGUNDO, Calif.—AT&T plans to buy satellite television provider DIRECTV for $48.5 billion, the companies announced this week. The deal will allow AT&T to expand its broadband network to more than 70 million customer locations, the companies said.

Both companies have home security/home automation offerings—AT&T has Digital Life and DIRECTV bought LifeShield Security last year. And according to Tom Kerber, director of research, home control and energy for Parks Associates, a Dallas-based market research firm, the acquisition of DIRECTV “just makes AT&T that much more of a powerful competitor” when it comes to the connected home.

That’s because, Kerber explained to Security Systems News, “the DIRECTV acquisition definitely expands the bundle of services that AT&T can offer consumers.”

He also believe the deal could allow the companies to take advantage of monitoring synergies—AT&T has two monitoring centers for Digital Life; LifeShield relies on third-party monitoring—and perhaps complementary sales strategies.

It’s not clear what AT&T and DIRECTV have planned for the home security/home automation part of their businesses as a result of the deal—which still must be approved by federal regulators.

In fact, Jonathan Collins, principal analyst with ABI Research, a New York-based technology market intelligence company, told SSN, “I just don’t think the smart home is one of the primary drivers of this deal. It may have a positive effect on both AT&T and Digital Life but I don’t think that greatly factored into the move.”

AT&T and DIRECTV make no mention of Digital Life and LifeShield in a lengthy May 18 news release on the planned sale. In a prepared statement, AT&T Chairman and CEO Randall Stephenson, describes the deal as “a unique opportunity that will redefine the video entertainment industry and create a company able to offer new bundles and deliver content to consumers across multiple screens – mobile devices, TVs, laptops, cars and even airplanes.”

When asked how the sale might impact security/home automation offerings, a source close to AT&T told SSN that it's premature to comment on what might happen with Digital Life or LifeShield at this point, but that AT&T and DIRECTV plan to continue operating as usual until the deal is finalized.

LifeShield referred a request for comment to DIRECTV, which had not responded by SSN’s deadline.

Still, Kerber and Collins say the deal carries potential benefits when it comes to the companies’ smart home and security services.

AT&T in April announced that Digital Life, its professionally monitored and professionally installed service, was thriving in 75 markets nationwide after trialing the service in 2012 in Dallas and Atlanta and then launching it in 15 markets one year ago. As of the end of this week, Digital Life will be offered in a total of 81 markets throughout the nation, debuting May 23 in six additional new markets ranging from Florida to California, AT&T spokeswoman Kuriko Wong told SSN.

And DIRECTV got into security last year with the purchase of LifeShield, a self-installed, professionally monitored, wireless digital security system.

Collins believes Digital Life is the stronger product of the two. He noted that DIRECTV only got into the security/smart home market in 2013 with the LifeShield buy. “That’s clearly an area they looked at and saw potential in, but maybe hadn’t gotten as far down the road as many of their [telecom and cableco] competitors,” he said. “… I would imagine AT&T Digital Life would take preference when it comes to promoting to new customers.”

In the deal, AT&T would gain 20 million new customers, according to news reports.

Kerber believes there will be bundling opportunities for AT&T in the deal. He pointed to a survey that Parks Associates did earlier this year showing how cablecos and telecoms are using that feature to their advantage. The survey showed that “23 percent of professionally monitored security systems acquired in the last 12 months were bundled with broadband TV, mobile or phone service.”

“So basically,” Kerber continued, “it’s the cable or telecom industry bundling security with their core services. … They’re essentially gaining some pretty good share of the new [security] systems; they’re not necessarily taking share from existing accounts but in the [new] growth, they’re taking a good bit.”

The AT&T-DIRECTV deal, he said, “helps AT&T compete more for its core business and for the security business, because of the attractiveness of the overall bundle.”

Both Kerber and Collins said the deal could result in monitoring synergies.

AT&T has two monitoring centers, one in Dallas and one in Atlanta, for which it received Five Diamond certification from the Central Station Alarm Association last year.

LifeShield and Protection 1 in 2012 announced a partnership in which Pro 1 became LifeShield’s monitoring provider.

“I guess there are savings that could be realized from [LifeShield] using the AT&T monitoring centers,” Collins said.

The AT&T-DIRECTV deal will be a stock-and-cash transaction for $95 per share based on AT&T’s May 16 closing price, according to the companies’ news release. The agreement has been approved unanimously by the boards of directors of both companies, but is subject to regulatory approval by the federal government.

“This purchase price implies a total equity value of $48.5 billion and a total transaction value of $67.1 billion, including DIRECTV’s net debt,” the release said.

The release also said the two companies would combine “complementary strengths to create a unique new competitor with unprecedented capabilities in mobility, video and broadband services.”

AT&T is a Texas-based telecom with a nationwide mobile network and a high-speed broadband network. California-based DIRECTV bills itself as the premier pay TV provider in the United States and Latin America and contends it has the “best technology for delivering and viewing high-quality video on any device … among major U.S. cable and satellite TV providers.”

AT&T’s “broadband network … will cover 70 million customer locations with the broadband expansion enabled by this transaction,” the release said. And because satellite TV can reach rural areas, AT&T’s geographic reach will grow, according to news reports.

News reports suggest that the AT&T-DIRECTV deal was spurred by Comcast’s plan, announced earlier this year, to buy Time Warner Cable for $45 billion. Both of those companies also have home security/home automation offerings. AT&T has denied that the Comcast-Time Warner deal, which also has yet to be approved by federal regulators, played a role in its DIRECTV plan.

But, according to Seeking Alpha, the deals have a similar aim. “The core purpose remains the same: to build the necessary scale to compete effectively in this capital-intensive business. … AT&T and DirecTV would control about 25 percent of the U.S. pay-television market if regulators approve the deal, while the combination of Comcast and Time Warner Cable would boast a market share of about 33 percent.”

Among features of the AT&T-DIRECTV deal, according to the news release, is that it will allow “the combined company to offer consumers bundles that include video, high-speed broadband and mobile services using all of its sales channels—AT&T’s 2,300 retail stores and thousands of authorized dealers and agents of both companies nationwide.”

AT&T’s strategy of selling home security in its retail stores has been key to the rapid growth of Digital Life, AT&T Digital Life President Kevin Petersen recently told SSN.

However, Kerber said adding more diversity to its sales strategy could be a boon to Digital Life. It's not clear what selling methods LifeShield uses but “to the degree this [deal] can help [AT&T] expand the sales channel beyond that retail, that would be good as well,” he said.

Should professional security companies be worried about the AT&T-DIRECTV deal?

Kerber said smaller dealers still retain their local service advantage over the giant telecom. “Obviously the security dealer competes on that personalized service and individual attention … and for people who value those services that’s going to be a differentiator for dealers for a long time, I think,” he said.

Collins said he doesn’t consider this deal a game changer. “AT&T moving into the security market—that certainly was a game changer. This is a continuation [of that],” he said.

However, Collins cautioned that for small security companies “in areas heavily served by satellite TV, you now have the potential to see smart home and security services competition to that customer base.”