Ergen Enigma: What's Next
EchoStar Split Would Leave Him With Options
By Mike Farrell -- Multichannel News, 9/30/2007 8:00:00 PM
EchoStar Communications chairman Charlie Ergen gave the industry a peek at his hand last week after announcing a deal to acquire Sling Media and possible plans to split the satellite television giant in two. And like the consummate poker player he is, Ergen is keeping most of his cards close to the vest.
But the former professional poker player who created EchoStar in 1980 may have a few aces up his sleeve, partly in the form of the split. Divvying up assets could create a high-tech entity for Ergen to run if he decides to sell the satellite-TV business — Dish Network — that made him a billionaire.
Forbes this month ranked Ergen, 54, as the richest person in Colorado, with a net worth estimated at $10.2 billion.
The Sling deal, for $380 million in cash and options, will give the satellite-TV giant an inroad into the mobile-video market. Sling is the maker of the Slingbox, a device that allows customers to view cable and satellite programming on their laptop computers while away from home.
And at least one analyst predicted that the deal could mean about 100,000 incremental subscribers for EchoStar in 2008. But it was the potential split-up of EchoStar that brought speculation last week about what Ergen planned to do with his iconoclastic career and collection of assets.
The potential split involves creating one entity that would house the Dish Network and its subscription-TV business. The other would house EchoStar's set-top box manufacturing, technology business and Sling.
By splitting off EchoStar's technology assets into a separate entity, Ergen can kill two birds with one stone. Bear Stearns media analyst Spencer Wang wrote in a report last week that the split could provide a vehicle for EchoStar to invest in high-speed Internet access technology while creating “a separate company that [Ergen] could run and expand if he were to sell/merge the consumer business.”
PLAYING HIS CARDS
While speculation about an EchoStar sale — particularly to AT&T — has been around for years, Oppenheimer & Co. cable and satellite analyst Tom Eagan said that the stars are beginning to align for a deal to take place.
“Although Mr. Ergen could run and control [EchoStar] for the next 20 years, we don't believe that's his strategy,” Eagan wrote in a report. “Rather, as the consummate poker player, he is more likely to sell at the opportune time.”
That time could be now, Eagan added. AT&T's IPTV initiative, U-Verse TV, is lagging behind its telco peers, landing 51,000 customers in the second quarter, compared to 515,000 for Verizon's FiOS TV product.
Eagan noted AT&T has failed to meet its homes passed targets for U-Verse — it now passes about 2.8 million homes out of its 18-million-home footprint — and has increased projected capital expenditures from $5.1 billion to $6.5 billion.
EchoStar fundamentals also continue to be strong. Revenue was up 11.9% in the second quarter, to $2.76 billion, and earnings rose 32% to $224 million in the period, compared to $169 million in 2006.
“It seems to us a matter of when, not if, AT&T acquires EchoStar,” Eagan wrote.
Eagan estimated that AT&T could pay as much as $56 per share for EchoStar — EchoStar shares were trading at $45.98 each, up $2.51 per share on Sept. 27. That would value a deal at about $25 billion.
But just what Ergen's ultimate goals are with the two transactions remains to be seen. And the EchoStar chairman is remaining characteristically vague.
In a prepared statement, Ergen said the Sling Media deal “paves the way for the development of a host of new innovative products and services for our subscribers, new digital media consumers and strategic partners.”
And on the proposed split, Ergen commented that separating the two units would “unlock value” and allow “employee incentives to be tied to their respective company's performance.”
INTERPRETING SIGNALS
Other analysts who follow the company believe that although an eventual sale is possible, it is more likely that both transactions signal a shift in strategy for the No. 2 satellite-TV service. In the past, EchoStar has balked at making big investments in high-speed Internet access networks or services. That, in theory, could allow Dish to control all three bases of its own TV, Internet access and Internet-protocol telephone set of services, to compete with cable operators' triple plays. Instead, EchoStar and Ergen have preferred to focus on offering expanded HDTV programming and keeping prices low.
But by splitting off its technology and retail units, EchoStar could heap debt on the technology company to develop or acquire Internet access properties and technologies to help it better compete with cable.
“At the very least, it will help the overall company to make new investments without having to dilute the retail shareholders,” Eagan said in an interview.
Just how much debt EchoStar could pile on the technology entity won't be known until more detail is available on the split. According to EchoStar's 10-K annual report, its technology business — which mainly makes set-tops for Dish Network — generated about $362.1 million in revenue in 2006.
The acquisition of Sling Media also could mean EchoStar could eventually incorporate the technology into its own set-top box and sell it to cable operators and telcos.
Ferris, Baker Watts cable equipment analyst Murray Arenson said while he expects a Sling-enabled set-top in the future, selling it to cable operators “would be a serious uphill battle.”
“The next hurdle for [EchoStar] will be addressing its broadband needs, especially in light of how Sling operates,” Arenson added. “If the Sling offering proves to be compelling enough over time, it could be a leverage point in negotiations to secure its own broadband capabilities. It could be interesting.”
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