Is Charlie Ready to Deal?

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EchoStar’s announcement last week
that it would acquire satellite-broadband company
Hughes Communications has added fuel to the growing
speculation that chairman
Charlie Ergen may be looking
to create a broadband
play for his other business
— No. 2 satellite-TV service
Dish Network.

EchoStar said last week
that it had agreed to purchase
Hughes, parent of
Hughes Network Systems,
for $1.35 billion ($60.70
per share). Including debt,
which would be refi nanced
in conjunction with the
closing of the deal, the
transaction would be valued
at more than $2 billion.
Hughes Network Systems
builds satellites and provides
high-speed Internet
services, mostly to commercial
enterprises and some
residential customers.

The deal was priced at a
31% discount to Hughes’
share price of $46.43 on
Jan. 19. However, it represents
a 1.7% discount
to Hughes’ stock price of
$61.78 on Feb. 11. Since the
Feb. 14 announcement,
Hughes stock has dipped
to $59.69 per share.

The transaction would
complement EchoStar’s existing business — it builds satellites
and set-top boxes for Ergen’s other endeavor, Dish
Network — but some analysts were hunting for deeper
meaning in the deal. In addition to the HNS deal, EchoStar
has offered to purchase 20 Megahertz of S-band spectrum
from TerreStar, a hybrid satellite-terrestrial broadband
company, for $1 billion. Earlier this month, Dish Network
offered to purchase DBSD North America, a hybrid broadband
network developer with another 20 MHz of S-band
spectrum, for $1 billion.

Those moves have sparked some speculation that Ergen
could be getting ready to sell Dish, possibly to AT&T. Th e
stock was up 8% on Feb. 10 after Credit Suisse analyst Jonathan
Chaplin speculated that the time may be right for a sale.

Wunderlich Securities media analyst Matt Harrigan,
who covers Dish Network but not EchoStar, said Ergen
could be looking toward a broadband offering, adding
that whatever he is up to, it doesn’t look like he is getting
ready to sell out.

“It feels like they are trying to cobble something new together
over there strategically,” Harrigan said. “That is not
consistent with selling companies.”

Harrigan said that new direction seems to be in the mobile
TV and broadband space, but that government restrictions
and cost are obvious obstacles.

In a research report last week, BTIG Research analyst
Walter Piecyk wrote that Ergen’s spectrum moves suggest
he is, perhaps, looking into creating a satellite-broadband
service for Dish.

“The question is whether his belief in broadband is
strong enough to justify a multibillion-dollar buildout of
a terrestrial-broadband wireless network,” Piecyk wrote.

Hughes derives about half of its $1 billion in annual revenue
from providing broadband service to about 500,000
customers, Piecyk wrote. Hughes is slated to launch another
satellite in 2012 that should improve its broadband
download speeds. Piecyk estimated that Ergen could use
the Hughes service to offer
satellite broadband to
Dish’s more remote customers
and to shift any existing
WildBlue Communications
broadband customers to

Dish currently offers a
satellite-based broadband
service powered by Wild-
Blue to its customers that
can’t get DSL or cable-modem
service at speeds ranging
from 512 kilobits per
second to 1.5 Megabits per
second with prices ranging
from $49.95 to $79.95 per

Building out a hybrid
broadband network would
be costly; Piecyk estimated
the price would be $3 billion
and development would
take two years to complete.

For that reason, Piecyk
believes that Ergen may
have other uses for Hughes
and the S-band spectrum.
He could sell it to AT&T,
which has been actively
buying wireless spectrum
for its wireless telephony
service, or use it as a bargaining
chit for space on an
existing broadband network.

Piecyk noted that Ergen could bargain for equity or
wholesale space in LightSquared, a wireless venture that
has pledged to build a 4G-LTE open broadband network
using mostly S-band spectrum that reaches 100 million
Americans by 2012 and 260 million people by 2016.

For its part, EchoStar said the combination will
“greatly enhance” its ability to transport broadband
video and data.

“There is a unique and compelling fit between Hughes
and EchoStar,” EchoStar CEO Michael Dugan said in a
statement. “With a rich engineering culture, an extensive
fleet of owned and leased satellites, and experienced personnel
in communications centers around the world, the
combination of EchoStar and Hughes will create a powerful
leader in video and data transport.”


Hughes operates the Spaceway
satellite broadband service for consumer
and commercial customers:

2009 Revenue: $1 billion

2009 Subscribers: 504,300

2009 Operating Income: $12.3 million

SOURCE: Company reports