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.
“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.
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.
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.