NEW YORK May 19 AT&T Inc's proposed acquisition of DirecTV will give the U.S. wireless provider a foothold in Latin America, a region that offers major growth potential in pay television and mobile broadband.
DirecTV, with its 18 million subscribers in Central and South America, is the biggest pay TV provider in Latin America where the market for such services is already growing at a much faster rate than the mature U.S. market.
DirecTV is "advantaged when compared with cable and telco in Latin America," AT&T said in a press release announcing its $48.5 billion proposal on Sunday. "Latin America has an under-penetrated pay TV market, about 40 percent of households subscribe to pay TV, and a growing middle class, and is DirecTV's fastest-growing customer segment."
Underscoring the importance of Latin America to the logic of the deal, AT&T said it would part with its $5 billion stake in billionaire Carlos Slim's America Movil to smooth the regulatory process and win DirecTV's business in the region.
DirecTV's Latin American operations have been considered its crown jewels for the past few years, accounting for 95 percent of its subscriber growth, but just 20 percent of its revenues.
DirecTV expects revenue to be in the $8 billion to $9 billion range, down from a prior forecast of $10 billion by 2016.
DirecTV owns about 93 percent of Sky Brasil, the largest satellite provider in the region's biggest economy. It has 41 percent of Sky Mexico, controlled by Mexico's Televisa and serving Mexico, Central America and the Dominican Republic.
It owns 100 percent of PanAmericana, which offers satellite TV services under the DirecTV brand in countries including Venezuela, Argentina, Chile, Colombia and Puerto Rico.
In December, DirecTV said it had an annual compound growth rate of 22 percent in Argentina, 16 percent in Venezuela and about 32 percent in the other countries served by PanAmericana, such as Colombia and Chile.
The combined AT&T-DirecTV might also take advantage of acquisition opportunities that DirecTV could not make on its own.
In 2013, DirecTV was looking to buy Vivendi's GVT, which provides Internet, phone and TV services in 149 Brazilian cities. The talks unraveled because France's Vivendi said the bids it received were too low.
One asset that analysts have mentioned as a potential takeover opportunity is TIM Participacoes, a cellular service provider that Telecom Italia is widely expected to sell in 2014. That could give AT&T an opportunity to accelerate DirecTV's roll-out of high-speed wireless Internet in Brazil and would give the company access to TIM Brasil's 73 million customers.
Some countries in Latin American however, present smaller growth opportunities and formidable economic hurdles.
Currency fluctuations and inflation are growing problems in the region. The Argentine peso has declined 24 percent year-over-year, while threats of political instability loom over DirecTV's business in Venezuela, where it is the No.1 TV provider with a 43 percent market share.
With the currency depreciation in Venezuela and Argentina, average revenue per subscriber, or ARPU, for DirecTV's PanAmericana in the first quarter fell to $41.23 from $46.54 a year earlier. In Brazil, where Sky Brasil has about a 30 percent market share, the real has also weakened.
Revenue per subscriber in the United States, meanwhile, climbed to $100.16 in the first quarter from $96.05 a year earlier.
In February, MoffettNathanson Research analyst Craig Moffett said higher churn, lower revenue per subscriber and higher subscriber acquisition costs in the first quarter were troubling DirecTV's Latin American business. Even so, he said much of the decline reflected currency shifts rather than deteriorating fundamentals.
In Latin America, "penetration is still low, incomes are rising and DirecTV's brand is very, very strong," Moffett added.
In the United States, DirecTV provides only television services. But in Latin America, the company has slowly ventured into the wireless broadband market, where weak infrastructure has hampered adoption of competing high-speed Internet services.
The company has airwave holdings that cover 43 million households across Argentina, Brazil, Colombia and Peru. It aims to provide Internet services to more than 5 million homes in those countries by the end of 2014, according to its website.
AT&T has extensive experience in acquiring and building wireless spectrum into cellular networks, and Latin America provides ample opportunities for further growth in Internet services. Broadband penetration in Brazil, for example, is only 33 percent, according to BTIG Research.
"DirecTV has been very conservative in their Latam approach. There is an opportunity for a new owner to exploit more growth, particularly in wireless broadband where they have seen initial success," said BTIG analyst Walt Piecyk. (Reporting By Marina Lopes and Liana B. Baker in NEW YORK; Additional reporting by Anthony Esposito in CHILE and Christine Murray and Elinor Comlay in MEXICO; Editing by Christian Plumb, Frank McGurty and Matt Driskill)