PdirecTV__130523212608ossibly, but the smart money today is betting that AT&T would prefer Dish. DirecTV shares are up 5.5% in mid-day trading following a Wall Street Journal report that the telco giant initiated conversations about a deal that could be worth $40B. But Dish Network is up even more at 7.5%. “We scratch our heads” at AT&T’s motivation to team with DirecTV because the satellite company “does not have wireless spectrum,” Wells Fargo Securities’ Marci Ryvicker says. She suspects the approach to DirecTV is a way “to perhaps ‘flesh out’ [Dish Chairman Charlie Ergen] to pursue some sort of transaction with Dish.” Guggenheim Partners’ Paul Gallant also says that AT&T would prefer Dish, which has been amassing rights to spectrum in the hope of creating a wireless broadband business. AT&TThat could be important for AT&T because “it is not immediately obvious where new spectrum comes from after the FCC’s broadcast spectrum auction in 2015.”

Wunderlich Securities’ Matthew Harrigan believes an AT&T-DirecTV combo makes sense. AT&T’s U-verse has just 5.7M video customers. Teaming with DirecTV, with 20.1M U.S. subs, would “offer a premium demographic national video solution that supports first to market 4K TV capabilities while allowing AT&T’s U-verse plant to be entirely dedicated to broadband.” (Its systems now allocate 15 Mbps to video and 10 Mbps to Internet.)

What would antitrust regulators or the FCC say if AT&T tries to acquire DirecTV? Comcast’s plan to pay $45B for Time Warner Cable “makes other pay TV mergers look relatively less problematic,” Gallant says. But MoffettNathanson Research’s Craig Moffett notes that Sprint also wants to buy T-Mobile and “three big media/telecom deals would be a nightmare” in Washington. Consumer response to Comcast-TWC “has been uniformly negative, and we’re only beginning to see Google and Netflix start to rally the troops against it. Add AT&T-for-DirecTV, and creating another 25-million-subscriber-plus Pay TV provider, could be a bridge too far, jeopardizing both deals. A Sprint-for-T-Mobile deal at the same time could very possibly bring all three crashing down.”