AT&T may be trying to pay a boatload for DirecTV, but it will make its money back if all goes according to plan.
The telecom company expects an annual cost savings of $1.6 billion three years after the proposed deal closes, cutting costs by 20 percent or more, according to a Tuesday SEC filing.
“Programming cost reductions are the most significant part of the expected cost synergies,” the company stated. They also expect revenues to climb through new product bundling opportunities.
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“U.S. consumers prefer to purchase pay TV service in a bundle with broadband connections and access video programming anywhere on any device, making mobile service a desirable part of the bundle,” AT&T wrote. “Today, DirecTV has service available to 115 million households, but it lacks an integrated broadband service to bundle with its video product.”
That’s where AT&T comes in.
Combining efforts, the two companies can offer a pay-TV, broadband and mobile service bundle to at least 70 million customers, and a pay-TV and wireless service bundle to approximately another 45 million U.S. locations.
Today, 97 percent of AT&T customers bundle their pay-TV service with other AT&T services, while cable providers have 75 percent or more of their subscribers on a bundle of video and broadband, the filing states.
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DirecTV helps AT&T on the video end.
The merger would offer the combined entity a greater scale of video and “the ability to offer programmers better value and therefore the opportunity for us to obtain correspondingly better per subscriber content costs,” AT&T said.
AT&T could also target selling to the hospitality industry, which is a strong area for DirecTV.
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Finally, the would-be parent company also sees a strong asset in the to-be subsidiary’s Latin American market.
DirectTV covers 43 million homes in Brazil, Colombia, Peru and Argentina. When combined with AT&T’s wireless data and broadband services, the new company will be able to offer video and broadband bundles to customers in “fast-growing, under-penetrated areas.”
The proposed merger still has to be approved, but AT&T is “confident” that regulators will give them the thumbs up.