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Still Neutral on DIRECTV

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Following the mixed third-quarter 2012 financial results, we maintain our long-term Neutral recommendation on DIRECTV Inc. . The company continues to generatehuge net customer addition in Latin America, increased ARPU in the U.S., and higher operating margin and OPBDA.

However, its net subscriber addition in the U.S. market has slowed down during the last four quarters. Management cited stricter credit standards and reduced promotional discounts are the primary reasons for soft net subscriber addition in the U.S.  DIRECTV is desperately trying to establish itself as a premier pay-TV operator targeting high-quality subscribers.

Management is confident that it will be able to achieve its long-term financial goals in 2013 without any setback. Nevertheless, competitive threats to the pay-TV industry and slow economic growth are the near-term concerns. In the reported quarter, DIRECTV added a net total of 67,000 subscribers in the U.S. compared with 327,000 net subscriber additions in the year-ago quarter.   

DIRECTV is looking for an option to acquire Vivendi SA’s subsidiary unit Global Village Telecom (GVT) – a Brazilian telecom carrier. GVT offers voice, broadband and pay-TV service in Brazil. At present, DIRECTV is Brazil's No. 2 pay-TV service provider. The company will generate enormous synergies if it becomes successful to acquire GVT by offering bundled voice, broadband, and high quality pay-TV services in Brazil. Alongside, DIRECTV, other major bidders for GVT are America Movil SAB (AMX - Free Report) , Liberty Global Inc. (LBTYA - Free Report) , and a private equity group. Bloomberg reported that bid offers for the first round were more than $7.76 billion each.

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