Analyst: Bundle Overhyped

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Pali Research media analyst Richard Greenfield initiated coverage of DirecTV Group with a “buy” rating and a $32-per-share 12-month price target last Monday, adding that the strength of the cable-TV bundle of voice video and data is overhyped.

In a section of his report entitled “Bundle — Smundle,” Greenfield cited DirecTV's addition of 761,000 net new subscribers during the past two quarters while cable, with its supposed superior bundle, has lost 543,000 basic customers in the same period. He added that with wireless substitution (customers who disconnect their landline service in favor of cellular telephone service) accelerating through out the country, cable phone service should be less of a threat to DirecTV.

While cable broadband service has clearly been a competitive advantage for MSOs, Greenfield believes that is leveling off as well.

“With over two-thirds of U.S. households already on broadband, DirecTV appears to have weathered the worst of the broadband threat,” Greenfield wrote, adding that as wireless broadband takes hold, cable's bundling power is further mitigated.

DirecTV also is making moves to simplify its corporate structure — through the restructuring of Liberty Media — and Greenfield believes that a sale is possible over the next 12 to 18 months.

Greenfield noted that in order to preserve the tax-free nature of the Liberty Media deal no sale could take place for a certain period, he believes an asset sale is Liberty chairman John Malone's ultimate goal.

“We have never viewed John Malone as a long-term operator of assets,” Greenfield wrote. “Malone is always searching for the next tax-efficient transaction to maximize his own/public shareholder value. DirecTV is yet another pawn in his 'game.' ”

Greenfield speculated that AT&T or Verizon Communications would be the most logical suitors for DirecTV.