babylaoui: Dish seen falling into DirecTV orbit as growth stalls

By Alex Sherman and Scott Moritz C.2012 Bloomberg News

Published: Saturday, November 10, 2012, 12:01?a.m.
Updated 23 hours ago

Dish Network Corp.?s stagnating growth is increasing the pressure on Chairman Charlie Ergen to combine with rival DirecTV, 10 years after a failed attempt.

Ergen said this week that the two largest U.S. satellite-TV providers ?have to consider? a deal, potentially joining a rush of consolidation in the telecommunications, cable and satellite-TV industries that has already topped $46 billion in the U.S. this year, according to data compiled by Bloomberg. Dish is facing declining profit this year, and analysts estimate sales will rise only 7.8 percent through 2014, less than 95 percent of the other cable and satellite-TV providers globally.

The Federal Communications Commission has said it will decide whether Dish can use its wireless spectrum to transmit mobile voice and data by year-end, and Sanford C. Bernstein & Co. says that may be the catalyst for a takeover of the $16 billion company. With use of the new airwaves, a combined DirecTV-Dish could offer fast wireless Internet connections that regulators are encouraging along with pay-TV, which may help persuade officials to approve a deal they blocked as anticompetitive in 2002, said Highmark Capital Management Inc.

?Regulators will be more open to a deal given how the industry has changed,? Todd Lowenstein, a Los Angeles-based money manager at HighMark, which oversees about $17 billion and owns shares of DirecTV, said. ?It?s a dream deal. A deal would really bring a lot of cost savings to the satellite industry, which is a low-growth to no-growth industry.?

No discussions between the two companies are happening yet, Ergen, 59, said during the company?s Nov. 6 earnings conference call. Ergen has a net worth of $10.8 billion, putting him in 84th place on the Bloomberg Billionaires Index of the world?s richest people.

Bob Toevs, a spokesman for Englewood, Colorado-based Dish, declined to comment further, and DirecTV spokesman Darris Gringeri also declined to comment.

DirecTV, based in El Segundo, Calif., and Dish are struggling to sign up more U.S. subscribers than they lose, in part because customers are switching to competing services such as AT&T Inc.?s U-verse, Verizon Communications Inc.?s FiOS and cheaper online alternatives Netflix Inc. and Hulu. Dish has reported a customer net loss in four of the last six quarters, and DirecTV posted its first-ever quarterly drop this year.

Dish and DirecTV are facing additional pressure because programming costs are increasing by a high-single-digit percentage each year as companies such as Walt Disney Co., owner of ESPN, and CBS Corp., home of the namesake broadcast network, push for higher fees.

?No Secret?

?It is no secret that the pay-TV industry continues to face a difficult economic environment and a more price-sensitive marketplace,? Dish Chief Executive Officer Joseph Clayton said on this week?s earnings call. ?The entire industry will have to rethink its current business model and strategy.?

A Dish-DirecTV deal may help limit increases in customers? TV bills, which can top $100 a month, because the new company, with a combined 34 million U.S. subscribers, may have more leverage in fee negotiations with channel owners, said Chris Marangi, a money manager at Rye, New York-based Gamco Investors Inc. His firm oversees about $37 billion, including more than 7 million DirecTV shares and more than 6 million Dish shares.

?You?ve got a challenging content cost environment where consolidation could be pro-consumer,? DirecTV Chairman and CEO Mike White said at a Sept. 21 conference. While he wouldn?t speculate about a potential tie-up with Dish, he said the industry has changed since the deal was rejected in 2002 as telecommunications firms have expanded across the country.

Deal Wave

Competitors are already pursuing deals to cope with the changing landscape. Last month, Japan?s Softbank Corp. agreed to a $20.1 billion transaction to gain a controlling stake in Sprint Nextel Corp., and Deutsche Telekom AG said it will merge its T-Mobile USA unit with MetroPCS Communications Inc.

There have been $46.5 billion of takeovers announced in the U.S. telecommunications, cable and satellite-TV industries this year, the highest annual volume since 2008, according to data compiled by Bloomberg. The tally excludes Softbank?s majority stake purchase in Sprint.

A decade ago, regulators blocked the proposed combination of the entities now known as Dish and DirecTV, saying it would harm consumers by creating a satellite-TV monopoly in rural areas not served by cable companies and reducing pay-TV competition in urban areas.

?Going from two choices to one is typically a no-no,? Blair Levin, a fellow at the Aspen Institute who previously worked for the FCC, said in an interview. ?That?s still going to be hard to overcome, because you still don?t have more than two multi-channel video options in those places.?

Still, several major U.S. markets now have four TV options: Dish, DirecTV, a regional cable provider and either FiOS or U- verse. Competitors such as FiOS, Hulu and Netflix?s streaming service didn?t exist when the previous deal was blocked.

One way Dish and DirecTV may be able to pass antitrust scrutiny is by offering rural customers the same promotional deals and prices frequently given in competitive regions, Levin said.

Dish is awaiting an FCC decision on whether it can use wireless spectrum it purchased to deliver Internet and voice services, an offering that also may ease the way for a deal.

Rural Internet

Both FCC Chairman Julius Genachowski and President Barack Obama, who was re-elected this week, have pushed for a nationwide expansion of high-speed Internet.

Giving rural Americans a new option to buy a Dish-DirecTV wireless product should mollify regulators? concerns about reducing satellite-TV competition, especially if safeguards are put in place to prevent price gouging, Ergen said in an interview last month.

?There isn?t an alternative to cable broadband in most of the country,? Craig Moffett, an analyst at Bernstein in New York, said in a phone interview. ?Ergen and DirecTV could sell the deal to regulators by arguing the spectrum can be used as an alternative to cable broadband that?s higher speed than DSL.?

Ergen is weighing his options as Dish is projected by analysts to post the lowest net income in three years in 2012. The company?s estimated revenue growth from 2011 to 2014 of 7.8 percent is the second slowest in the cable and satellite-TV industry and trails the median of 21 percent among the 22 companies for which projections are available, data compiled by Bloomberg show.

Cost Savings

It costs Dish and DirecTV more than $800 each time a customer signs up for service due to satellite dish and set-top box installations. Many of the customers then just switch to the other satellite-TV provider, Bernstein?s Moffett said.

?The dirty little secret of a Dish-DirecTV deal is you can?t sell the Department of Justice by saying the reason this deal makes sense is that customers will have less choice, but the reality is that costs would drop like a rock,? he said.

Absent a tie-up with DirecTV, AT&T may be among potential suitors for Dish in an attempt to reach more customers for bundled TV, Internet and calling packages, said Jan Dawson, a New York-based analyst with Ovum Ltd. The company said it will expand its Internet Protocol broadband network from 64 percent of eligible homes and small businesses to 75 percent within its 22-state region by the end of 2014.

?They still need some kind of solution for the other 25 percent of the footprint to compete with cable companies? bundled services,? Dawson said in a phone interview. ?Dish would flesh out AT&T?s TV offering outside its U-verse footprint.?

Attractive Spectrum

Lauren Nadig, a spokeswoman for Dallas-based AT&T, declined to comment on whether the company would be interested in buying Dish.

Dish also has attractive airwaves, especially those in the 700-megahertz band that would fit well with AT&T?s current holdings, said Chris King, an analyst with Stifel Financial Corp. in Baltimore.

?Ergen?s best option would be to sell the spectrum or sell the company outright to someone that can use the spectrum,? King said in a phone interview. ?Running a wireless business isn?t a viable option.?

While AT&T says it?s always looking for more airwaves to accommodate the growth in wireless network traffic, CEO Randall Stephenson said the acquisition of so-called WCS spectrum from NextWave earlier this year helped relieve immediate needs.

?A year ago, we had a spectrum problem and we talked about Charlie sitting on a nice chunk of spectrum,? Stephenson said in an interview, referring to Dish Chairman Ergen. ?But things have changed and we?ve charted our own path.?

?A partnership is a possibility,? Stephenson said.

Sprint remains the ?wild card? as a possibility to combine or partner with Dish after its Softbank investment closes, Gamco?s Marangi said.

Sprint is open to partnerships with spectrum holders, said Scott Sloat, a spokesman for the Overland Park, Kansas-based company. He declined to comment specifically on Dish.

Still, DirecTV makes the most sense, Marangi said. DirecTV has a market value of $29.8 billion yesterday and held $2.4 billion in cash as of Sept. 30.

?In my view, the highest probability combination would be with DirecTV,? Marangi said. ?DirecTV likely has the financial capacity to do a deal even if Charlie isn?t willing to take stock.?