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DirecTV: Potential GVT Bid A Key Near-Term Risk To The Stock

 January 07, 2013 03:34 PM

(By Mani) Press reports suggest that DirecTV (NASDAQ: DTV) is one of four bidders remaining for GVT, Vivendi's telecom subsidiary that provides competitive voice, video and data in 120 local Brazilian markets. However, the potential bid may pose near-term risks to DirecTV stock.

GVT is one of Vivendi's six main assets and is considered its most attractive. The company provides its services using fiber-to-the-curb infrastructure, with plans to enter another 65 in the next five years. GVT competes with other Brazilian cable companies such as Net Serviços and Embratel both owned by America Movil), TVA and Abril (both owned by Telefonica) and Oi.

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Media reports suggest other telco/pay TV operators have dropped out, leaving DirecTV and private equity firms as the remaining bidders.

"We believe these entities have begun the due diligence process and expect firm bids in March. Vivendi management has stated that it hopes to have a resolution by its annual general meeting in April," UBS analyst John Hodulik wrote in a note to clients.

DirecTV has emphasized that while it is interested in the asset, it will be disciplined in its evaluation of GVT's value, and aims to maintain its investment-grade credit rating.

"Our main takeaway is that an acquisition of GVT for cash in the amount suggested by management of Vivendi (GVT's owner) would likely require curtailing or pausing the buyback given the leverage DTV would have to take on and its desire to remain investment grade," Hodulik noted.

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The buyback theory is significant because DirecTV repurchased 15.2 percent of its stock in 2011 and an estimated 14.6 percent in 2012, and more than half of its outstanding shares since 2007.

The repurchase program has provided key support to the stock and is the main attraction for many shareholders. Reducing or pausing the buybacks could cause significant turnover in the shareholder base, and dislocation in the stock.

"In this sense, we believe DirecTV's repurchase plan has boxed the company into a corner, to a certain extent," the analyst said.

The company needs to make some strategic moves in the U.S. given the direction the pay TV industry is moving, with more content available on-demand and on alternative devices, and longer- term in Latin America, given the need for local infrastructure there.

Both of these moves could require a re-evaluation of the buyback program and hurt the stock, regardless of the strategic rationale behind them.

Moreover, though while GVT is fast-growing, it is tiny relative to DirecTV Latin America, with just 410K video customers at the end of November. This comparing to nearly 5.0 million subscribers in Brazil for DirecTV, roughly half of its Latin America subscriber base and equating to 31.1 percent market share.



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