May 19 (Bloomberg) -- Within days of learning that Comcast Corp. planned a deal that would make the biggest U.S. cable company an even larger competitor, AT&T Inc.’s chief executive officer was planning his response.
Randall Stephenson reached out to his counterpart at DirecTV soon after learning of Comcast’s effort to acquire Time Warner Cable Inc. for $45.2 billion, according to a person with knowledge of the matter. Just three months later, AT&T struck a $48.5 billion deal to acquire DirecTV and combine the national satellite-TV provider with AT&T’s wireless, phone and high-speed Internet services.
Competition among the companies is increasing as Americans change their TV-watching habits -- turning to video delivered over broadband and wireless networks instead of by cable and satellite -- and Stephenson and DirecTV CEO Mike White saw an opportunity to offer mobile-video on a national scale.
“Over the last year, things began to change with technologies -- AT&T started to be able to offer more broadband and better broadband,” White said in a telephone interview after the deal was announced yesterday. “With it comes a continuing evolution for mobile video. It’s about TV everywhere and watching TV on all devices.”
Dish Network Corp.’s agreement with Walt Disney Co., which gives DirecTV’s rival rights to Internet-distributed video, also pushed the companies together, another person said, asking not to be identified discussing private information. DirecTV’s own deal with Disney comes up for renewal later this year.
The two CEOs had discussed the idea of a transaction informally for at least a year, though the talks took on a more serious tone in the past few month, they said yesterday. DirecTV, the second-largest U.S. pay-TV provider, has “unequivocally the best content relationships and contracts,” Stephenson said in the interview.
Once the deal was underway DirecTV referred to it as “Project Star,” giving AT&T a codename “Star” and itself the name “Discovery,” one of the people said. Companies and their advisers often use codenames to prevent inadvertent leaks of information on a deal.
Both companies face new threats, including the cable industry’s network of Wi-Fi hotspots that could lead to new mobile products, and Dish’s push to deliver video over the Internet.
AT&T has the ability to provide broadband to about 70 million U.S. homes. Stephenson, who praised DirecTV’s ongoing work to create an Internet-delivered TV product to challenge Dish, declined to say when an offering would be made available to the public.
Comcast in February agreed to acquire Time Warner Cable, in a move combine the No. 1 and No. 2 U.S. cable providers to defend against challenges from phone and satellite companies as well as newer services such as Hulu LLC and Aereo Inc. Together the cable providers will be able to better negotiate terms with content providers, generating savings of about $1.5 billion and boosting cash flow.
AT&T and Comcast aren’t the only ones exploring how to respond to a changing environment. Charter Communications Inc. also sought to acquire Time Warner Cable, and eventually struck a deal with Comcast for some of the company’s subscribers.
AT&T competitors Sprint Corp. and T-Mobile US Inc. may propose a $30 billion merger in June or July, and Dish Chairman Charlie Ergen has said he would be interested in acquiring T-Mobile if regulators block Sprint’s efforts.
While Ergen this month said DirecTV’s price was “too frothy” for him to make an offer that would compete with AT&T, he did approach White about a possible merger earlier in the year, people with knowledge of the matter have said.
The threat of a rival bid wasn’t lost on Stephenson. DirecTV has agreed to pay a breakup fee of about $1.46 billion if the deal with AT&T is derailed by another company, two people with knowledge of the matter said.
While AT&T’s motivations also include getting DirecTV’s billions in free cash flow to pay out its dividend for years, both CEOs were excited by the potential strategic advantages that arose as the talks continued, White said.
To contact the editors responsible for this story: Mohammed Hadi at firstname.lastname@example.org Elizabeth Wollman