The just-consummated merger between AT&T (NYSE: T) and DirecTV (NASDAQ: DTV) has created the largest pay-TV operator in the U.S. with around 28 million subscribers. But Evercore ISI doesn't believe that scale will enable the combined company to overcome endemic pay-TV problems.
"We believe the combination offers limited incremental strategic value and does not solve either company's longer-term secular challenges -- slowing growth in a maturing marketplace and a shift to OTT video that neither satellite nor U-verse is capable of addressing," Evercore wrote in a note to investors today.
Evercore is also skeptical about DirecTV's continued subscriber growth in Latin America, which it believes will slow over time, "and eventually turn negative," despite low pay-TV penetration in the region. "The market appears to be close to saturation in terms of customers [who] can afford the service," the advisory added.
Latin America has been DirecTV's fastest growing market. The satellite TV operator reported 12.5 million subscribers in the region at the end of the first quarter, but the growth rate has been slowing of late.
The FCC voted to approve the merger Friday, ending a 14-month regulatory process. After closing the deal, AT&T put John Stankey in the role of CEO of AT&T Entertainment and Internet Services, which will house the combined "Home Solutions" operations of both AT&T and DirecTV. Mike White, chairman and CEO of the satellite TV company, will retire.
To approve the deal, the FCC mandated a range of conditions, requiring AT&T to deploy fiber-based broadband services to 12.5 million customer locations, for example. AT&T will also not be able to discriminate in terms of network access against rival video services, and it must run all peering agreements by the FCC.
"Upon first glance, the FCC's conditions for the AT&T/DTV deal approval appear reasonable and should have a negligible impact on deal economics," Jefferies wrote in its own note to investors.
Related articles:
AT&T closes DirecTV purchase: Stankey in charge of new 'Home Solutions' operation, White retires
FCC poised to approve AT&T-DirecTV deal, create top pay-TV service in the U.S.
AT&T-DirecTV deal gets approval from FCC's Wheeler, with conditions