Kicking the tires on the widely held belief that AT&T's (NYSE: T) proposed $49.5 billion purchase of DirecTV (NASDAQ: DTV) will sail through the regulatory approval process, media analyst Craig Moffett crunched some of the key numbers federal officials will be looking at when they decide to approve or nix the deal.
Here is his essential conclusion, published Friday in a MoffettNathanson Research post to institutional investors: The deal will probably get the OK, but it will involve more "sweat" than "sailing" for the key parties.
On a national level, Moffett writes, consolidating AT&T and DirecTV's pay TV assets will create a "relatively benign" threat to competition. "Out of 100.4 million pay TV subscribers in the U.S., DirecTV has 20.3 million and AT&T just 5.7 million," Moffett notes. "Together, their market share will amount to 25.8 percent, a modest 5.6 percent increase compared to the 20.2 percent DirecTV has on a standalone basis. Generally speaking, this sort of increase is not sufficient to raise eyebrows in D.C."
Regulatory stickiness, Moffett believes, could arise from the fact that DirecTV and AT&T's U-verse services overlap in about 25 percent of the country. This will affect the Herfindahl-Hirschman Index, which is a guide decision-makers at the Department of Justice and Federal Trade Commission use to measure the level of concentration in specific markets.
Without getting too in-the-weeds in explaining this formula, scores increasing the index by less than 100 points after merger are generally regarded as non-issues for regulators. But in specific markets where DirecTV and U-verse are the only alternatives to cable--or the only pay TV options at all--the HHI indexing for the deal is nearly off-the-charts. In fact, in some rural areas, Moffett calculates the market concentration increase factor to be as high as 667 points.
The analyst concedes that regulators don't look at HHI dogmatically: online video alternatives will certainly be considered, for example. And he thinks regulators will be hesitant to balk on another big AT&T deal after nixing its T-Mobile (NYSE:TMUS) acquisition ambitions in 2011.
Moffett sums up his report this way: "To be clear, we're still of the view that the deal will get done. Regulators are not mechanically bound by HHI analyses … But after running the numbers, we think the approval process may induce a little more perspiration than we had originally thought."
- MoffettNathanson has this blog post (sub. req.)
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