Wall Street Sizes Up a Satellite Merger
EchoStar Rises on DirecTV Deal Talk
By Linda Moss -- Multichannel News, 7/23/2006 8:00:00 PM
Rupert Murdoch thinks DirecTV Inc. would pass regulatory muster if it tried to acquire satellite-TV rival EchoStar Communications Corp. — but Wall Street and industry analysts aren’t convinced a deal could really happen.
EchoStar’s stock price hit several 52-week highs last week — including last Friday morning, when it was at $33.53 — following a Los Angeles Times story that said the buzz at Allen & Co.’s media conference was that News Corp. chairman Murdoch was working on a deal to buy EchoStar to combine it with DirecTV.
Murdoch, whose News Corp. owns 38% of DirecTV, added fuel to the fire when he was asked about a possible merger last Thursday during an appearance on PBS’s The Charlie Rose Show.
| DBS POWERS | ||
|---|---|---|
| The two satellite giants at a glance: | ||
| * As of March 31, 2006 Source: Company reports and Nasdaq.com |
||
| DirecTV: | Subscribers: | 15.4 million* |
| 2005 Revenue: | $13.2 billion | |
| 2005 Net Income: | $335.9 million | |
| Market Capitalization: | $21.4 billion | |
| EchoStar Communications: | Subscribers: | 12.3 million* |
| 2005 Revenue: | $8.4 billion | |
| 2005 Net Income: | $317.5 million | |
| Market Capitalization: | $6.9 billion | |
'PAINFUL’ TALKS
“Well, we’d have to get through the negotiating stage [with EchoStar], which would be very painful,” Murdoch said, joking that it would be painful “maybe” for both him and EchoStar chairman Charlie Ergen, who he described as a “good friend.”
During the interview, Rose pointed out to Murdoch that Ergen’s 2002 bid to buy DirecTV (when it was controlled by General Motors Co.) was effectively scotched by the Federal Communications Commission and the Department of Justice. “After a little lobbying,” Murdoch said, alluding to his reported efforts to scuttle EchoStar’s bid for DirecTV, which then permitted News Corp. to get a stake in the satellite company. Rose then asked if Murdoch was taking credit “for derailing” EchoStar’s deal.
“No. It was clearly, in those times, very doubtful legally,” Murdoch said. “I think today it is different — the broadband coming, the revolution, there are many more alternatives, ways of getting pictures and information, that I think it would be much harder for the government to turn it down today. But as I say, we’d have to get through a negotiation with Charlie. Then there would be the question of who would run it.”
At least one Wall Street analyst said a DirecTV purchase of EchoStar, which would result in a satellite giant with roughly 27 million subscribers, would create enough cost efficiencies to permit the combined company to forge ahead with a wireless-broadband offering.
Without a broadband play, DirecTV and EchoStar’s Dish Network can’t match cable’s successful triple-play bundle of video, voice and high-speed data service.
Murdoch is already making an aggressive move to offer broadband in Great Britain. Just last week, his British Sky Broadcasting Group PLC unveiled plans to offer free broadband service to current customers. It expects to spend $720 million over the next three years to launch the offering.
BROADBAND NEEDED
“I firmly believe DirecTV, just like BSkyB announced this week, needs a broadband solution,” Pali Research analyst Rich Greenfield said. “The world is moving to an [Internet Protocol] platform, and neither DirecTV nor Dish have a broadband platform. Long term, they need to provide a broadband platform, and I believe that a merger would provide significant cost savings to allow them to pursue an aggressive wireless-broadband strategy.”
Greenfield said he didn’t believe a DirecTV-EchoStar deal was “imminent,” though, seeing it more as a possibility in 2007.
Murdoch also reiterated to Rose comments he made previously about DirecTV negotiating with potential partners to deliver a wireless-broadband product.
“The technology doesn’t seem to be a problem, it’s getting the frequencies,” Murdoch said.
Combining DirecTV and EchoStar would save billions of dollars a year through economies of scale and eliminated redundancies, in part by eliminating satellites and obtaining more leverage in programming deals.
Citigroup analyst Jason Bazinet upgraded EchoStar to “buy” from “sell,” with a $39 price target, after estimating a merger could yield cost synergies of up to $3 billion a year.
Officials at DirecTV, News Corp. and EchoStar declined to comment last week.
At least one lawmaker and some analysts argued, like Murdoch, that the media landscape has changed enough in the past four years, with phone companies getting into the video business, that a monster DBS merger could squeak through federal regulators this time.
In vetoing the EchoStar-DirecTV deal in 2002, the FCC cited lack of video competition in rural markets after such a merger. Ultimately, News Corp. stepped in and bought the DirecTV control stake.
BOUCHER ON BOARD
Rep. Rick Boucher (D-Va.), who represents rural Virginia and has been active on satellite issues since the 1980s, favored the last attempt to combine EchoStar and DirecTV.
“I frankly thought at that time the merger was not inappropriate.” Boucher said. “Now you’ve got telephone companies on the verge of becoming multichannel video providers, and so the market will grow even more competitive and that would strengthen the case for anti-trust approval should a merger come about.”
Many on Wall Street agree with Boucher.
“The government would probably be less disinclined to approve it than they were three or four years ago, because you have so much consolidation in the telecom sector and ostensibly, you’re getting more video competition from the telcos,” said Matthew Harrigan, an analyst at Janco Partners. “But it still wouldn’t be a lay-up in Washington.”
The American Cable Association, a lobbying group for small operators, would oppose what it said would essentially be “combining an industry” today.
“The merger of DirecTV and EchoStar would be, frankly, even more harmful in the marketplace, because then you would have one unified competitor in even a better position to dictate terms and prices and have nationwide distribution upon which to place its programming,” ACA president Matt Polka said.
Several analysts didn’t give strong odds to a potential DirecTV-EchoStar merger overcoming regulatory hurdles.
“As soon as the telcos really become a competitive force, then there’s a significant possibility that this can happen,” said Jimmy Schaeffler, senior analyst for The Carmel Group. “But until that time, I don’t see that happening. It’s just too close on the heels of the EchoStar-DirecTV merger, which was turned down 5-0 by the FCC at the time, and against which the DOJ filed.”
Oppenheimer & Co. analyst Tom Eagan was also skeptical.
“We’re not quite sure if the congressional perspective had changed enough to this time around allow a deal to go through,” he said.
FOX NEWS FACTOR
A new DirecTV-EchoStar merger might be even less palatable to Washington because News Corp. owns programming and a DBS merger would grant it a huge U.S. distribution platform, raising “the 900-pound gorilla issue of vertical integration,” according to Craig Moffett, an analyst with Sanford C. Bernstein & Co.
Moffett also questioned whether Democrats would want Murdoch and Fox News chief Roger Ailes to have the largest distribution platform in the country. “That said, a merger certainly can’t be ruled out,” he wrote.
While a deal would create efficiencies that save money for DirecTV and EchoStar, there are obstacles above and beyond Washington.
Wachovia Securities LLC analyst Jeffrey Wlodarczak pointed out that the “takeout price” in any deal would be an issue because “we would suspect that Ergen would want at the very least $40 per Dish share.”
Mike Farrell and Ted Hearn contributed to this story.
EchoStar vs. News Corp.
11/03/2006Murdoch Fuels DirecTV-Dish Rumor
07/21/2006Wall Street Journal: We Belong to Murdoch
07/31/2007DirecTV Contest May Be Over
10/28/2001
