GuruFocus recently added a new feature for premium members to use to help with researching a company. This feature is the Checklist, which can be found on every stock's page. There are five checklists, along with a personalized checklist option.Ă‚
In past articles, I analyzed Target Corporation (TGT, Financial) using Ben Graham's Net-Net Checklist. I also analyzed Facebook (FB, Financial) using Peter Lynch's Fast Grower Checklist, as well as Coca-Cola (KO, Financial) with Lynch's Stalwarts Checklist.
This week, I have taken a look at the merger between AT&T (T, Financial) and DirecTV (DTV, Financial) using John Paulson's Merger Arbitrage Checklist. I am not trying to persuade anyone to buy a certain stock based on my answers. The purpose is to show you how the Checklist feature works. The star rating is subjective and can vary from each investor.
1.Ă‚ The merger parties have Definitive Agreements, instead of Agreements in principle
Both parties entered a definitive agreement in which AT&T will purchase DirecTV, which was unanimously approved by both companies' Board of Directors. As a combined company, it plans to offer mobile, video and broadband services.
2.Ă‚ The merger has strategic rationale behind it
As a combined company, it will now have the ability to offer new bundles to the 28 million subscribers combined, which will include video, high-speed broadband and mobile services on all of its sales channels.
Chief Executive of DirecTV, Mike White believes the merger is a “significant win for customers” because the company will now be able to “deliver a competitive alternative to the cable bundle.”
The merger will also allow DirecTV to bring down content cost as well as programming cost.
3.Ă‚ No financing condition
AT&T agreed to purchase DirecTV for $48.5 billion in cash and stock. If the agreement is terminated for any reason, DIrecTV is required to pay a termination fee of $1.5 billion to the company. According to the terms of the agreement, AT&T could have opted out of merging with DirecTV if the rights to the Sunday Ticket package with the NFL were not renewed.
Uncertainty for employees was outlined, as AT&T notes that a large number of video network and other operational systems and administrative systems must be integrated. This may suck up a significant amount of management's time and thus create uncertainty for customers and suppliers along with employees. Integration may also result in significant expenses and charges against earnings, both cash and non-cash.
On a positive note, the merger will result in cost savings, especially in video content costs, along with other synergies.
AT&T expects to save $1.6 billion through “cost synergies,” which could mean employee layoffs are in the works.
“I wouldn’t expect massive headcount reductions, but some is probable,” said Jonathan Schildkraut, managing director of telecom equity research at Evercore Partners.
4.Ă‚ No due diligence condition
Before DirecTV decided to merge with AT&T, it entered into a due diligence agreement, similar to the one the company currently has with AT&T with an undisclosed party, referred to as “Company A”. DirecTV agreed to merge with AT&T instead. The deal came together quickly and both companies formed due diligence teams.
If, for whatever reason, regulators decide to reject the merger, AT&T will not be required to pay a reverse break-up fee or penalty.
5.Ă‚ Solidly performing target
We gave DirecTV a Financial Strength rating of 6 and a Profitability/Growth rating of 8, both weighed on a scale of 10.
The company’s Current Ratio is 1.01, indicating good short-term financial strength.
Cash to debt ratio is 0.15
Gross margin is 46.88%, indicating that the company is durable, with a competitive advantage.
When observing the balance sheet, I noticed the company’s assets were $5,953,000 and liabilities were $6,530,000, indicating that DirecTV’s balance sheet is weak.
A due diligence condition reveals uncertainty. AT&T may see that DirecTV has a lot of potential to be successful, but there is no certainty.
6.Ă‚ Reasonable valuation
DirecTV’s management did not receive many positive reviews on Glassdoor. 616 employees anonymously contributed their experiences and noted that upper management lacks respect for employees by intimidating them when terminating employment. Some have also noted there is a sense of racism from the managing team, along with micromanaging, not being aware of what’s going on and pettiness.
The company has an overall score of 3.3 stars out of 5 and 77% approve of the CEO.
7.Ă‚ Limited regulatory risk
In October, the FVV paused its 180-day informal clock in its review of the merger between both AT&T and DirecTV as well as Time Warner and Comcast.
The hold was due to a concern that combining the largest media broadcasters would result in “skewed distribution”. AT&T argued that the merger will help consumers by expanding video choices and promoting competition within the cable industry.
Overall score: 3.3/5
Although I gave the merger an overall score of 3.3 based on my research, I encourage you to use the Merger Checklist to conduct your own research and rate the blended company accordingly, based on your answers. As I said before, the star rating is subjective and may not produce the same results as mine.
