AT&T prowling for more Latin America deals after DirecTV
NEW YORK - Even after buying DirecTV and its 18 million subscribers in Latin America, AT&T is on the lookout for more acquisitions in the region, which is growing 10 times faster than the U.S.
The $48.5 billion takeover - inching closer to completion after DirecTV shareholders voted in favor - will give AT&T satellite-TV subscribers across Latin America, particularly in Mexico and Brazil. The deal will mark AT&T's first push outside the U.S. in more than a decade, expansion that is crucial to driving growth as the domestic wireless industry becomes more saturated, according to Fitch Ratings.
The key to competing in these new markets may be offering customers not just satellite TV, but also mobile-phone service and broadband access in countries like Mexico, where less than half of homes pay for TV or Internet. AT&T needs to acquire more assets south of the border if it's serious about spurring growth outside the U.S., said Jonathan Chaplin, an analyst with New Street Research.
"DirecTV has a great, competitive product in Latin America, but they will need broadband capabilities," Chaplin said. DirecTV has been testing wireless Internet access, when it may make more sense to buy large landline networks that already have broadband subscribers, he said.
In the U.S., AT&T has limited options to expand its phone and TV services, and new offerings like home security and selling wireless service to connect cars to the Internet are still in the early stages. The company's revenue is projected to rise between 1 and 2.5 percent annually for the next four years, according to analysts' estimates compiled by Bloomberg.
John Stankey, AT&T's strategy chief, has said that Mexico - - where a new law has overhauled the telecommunications industry to promote competition - is poised for investment.
Dallas-based AT&T is among the companies that America Movil has contacted about buying $17.5 billion of Mexican wireless and landline businesses, people with knowledge of the matter said last month. Stankey met with Mexican telecommunications regulators in September to discuss the market and the new laws designed to ignite investment.
Carlos Slim's America Movil has said the buyer needs to be new to the Mexican market to create more competition. When asked on Bloomberg TV Tuesday whether America Movil was closest to a deal with AT&T, the billionaire declined to comment.
After shelving the idea of acquiring Vodafone Group Plc earlier this year and then declaring that the acquisition window was closing in Europe, AT&T quickly shifted its attention to Latin America. The DirecTV deal was announced a few months later.
When asked at an investor conference last month if the DirecTV deal precluded other mergers and acquisitions, Stankey said the company's balance sheet gives it financial flexibility to take advantage of opportunities, even if the timing isn't perfect.
The breakup of America Movil in Mexico might provide just such an opportunity because it would help AT&T offer more services, said Stephen Sweeney, an analyst with Elevation LLC.
"AT&T is already buying TV subscribers in Latin America, so if America Movil is divesting landline and wireless assets in Mexico, then AT&T can then buy those and offer a triple or even a quad play in Mexico," Sweeney said.
With less than half of the homes in Mexico subscribing to cable or satellite TV, there's more room for growth than other parts of the world, like the U.S. In Mexico, about 44 percent of homes with televisions pay for cable or satellite service, compared with 84 percent of homes in the U.S. that have conventional pay TV.
Similarly, broadband penetration in Mexico is 30.7 percent of homes, according to the Mexican telecommunications regulator. That's less than half the portion in the U.S., where about 70 percent of U.S. homes have Internet access.
"If you step back and think about Mexico, it is a place that's prone to move into an incredible growth cycle," Stankey said at the conference.
In Mexico, DirecTV owns 41 percent of Sky Mexico, the satellite-TV service majority owned by Grupo Televisa SAB. And in Brazil, AT&T will pick up DirecTV's 93 percent stake in Sky Brazil, which has about 5.6 million customers.
The transaction is still waiting on U.S. regulatory approval, and DirecTV Chief Executive Officer Mike White said two weeks ago that he expects the deal to close in early April.
To clear regulatory hurdles for the purchase of DirecTV, AT&T sold a minority stake in America Movil after about 24 years. The move, Stankey told investors last month, shifts AT&T from a passive investor to an active investor in Latin America.
"Given the proximity of Mexico to the United States, if we weren't looking at Mexico and Latin America more broadly, and thinking about what opportunities there were to further shareholder returns down there and begin to diversify our revenue sources, I think we'd be asleep at the wheel," Stankey said at the conference.
DirecTV's revenue growth in Latin America has been outpacing the U.S. Latin America sales grew 10 percent in 2013, while in the U.S., where DirecTV is the largest satellite-TV provider, sales increased by 6 percent. DirecTV's Latin America growth was 10 times AT&T's total revenue gain of 1 percent last year.
Brad Burns, an AT&T spokesman, declined to comment on Latin America beyond what Stankey said at the conference.
The bigger prize for AT&T may be Brazil, said Amy Yong, an analyst with Macquarie Securities USA Inc. DirecTV has laid the groundwork for satellite-TV service in Brazil. Now, AT&T can basically build on that base and add products like wireless home service, providing a way to connect homes in regions that don't have phone lines, she said.
"Pay-TV penetration is still pretty low in Brazil. DirecTV was just getting the appetite going," Yong said in a phone interview. "Bundling with wireless service will help once the TV business is part of AT&T."
Latin America should stay on a 20 percent annual revenue growth rate as long as there are no troubles with the macro economy, Yong said. That means the potential for higher cash flow to help fund AT&T's coveted dividend.
AT&T pays a quarterly dividend of 46 cents a share, an amount it has raised annually for the past 30 years. The company has the 13th highest dividend yield in the Standard & Poor's 500 index.
"I don't think the market fully appreciates Latin America and the ability there to generate a lot of cash," Yong said. "The U.S. has been a big cash flow machine, but in a few years I think that it will be Latin America. That's the big opportunity for DirecTV and AT&T."