DirecTV Rumor Mill Spins Its Way to CES

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Next week at the nation’s biggest consumer-electronics confab, the chiefs of DirecTV Group and EchoStar Communications, Chase Carey and Charlie Ergen, are scheduled to appear on a “Pipelines Power” panel.

Carey and Ergen — along with several cable operators and broadcasters — are slated to discuss “the state of content delivery” and “what partnerships are in the works,” according to the agenda of the 2007 International Consumer Electronics Show.

The Jan. 8 panel in Las Vegas couldn’t be more timely. It comes in the wake of Liberty Media’s $11 billion deal late last month to swap its 16.3% stake in News Corp. for Rupert Murdoch’s 38.5% stake in DirecTV.

There’s been much speculation about “partnerships” since the pact was announced Dec. 22: Namely, whether Liberty chairman John Malone will seek to merge the nation’s largest satellite provider with Ergen’s Dish Network, the second-largest direct-broadcast satellite player. Such a union would create a satellite superpower with 28.6 million subscribers, a base that would exceed cable leader Comcast’s 24.1 million customers.

It remains to be seen whether Ergen and Carey address that topic, duck it or even cancel their scheduled appearances rather than be in the hot seat. They were still confirmed to appear as of deadline last Friday.

Wall Street and industry analysts all have their own theories about the mercurial Malone’s motives — and end goal — for DirecTV.

REGULATORY MUSTER

While a few analysts believe it’s a no-brainer that Malone will seek to merge DirecTV with EchoStar, the majority on Wall Street scoff at that notion. They argue that there is no way such a proposal would ever pass muster with the U.S. Department of Justice.

Others are predicting that Malone will flip DirecTV to a telco, with AT&T considered the most likely buyer in that scenario.

Some media analysts believe Malone, who sold cable giant Tele-Communications Inc. to AT&T in 1999, was motivated to once again be a distributor. Now he’ll regain a platform that he can use to launch new networks or to expand carriage of Liberty’s existing programming services.

And then there are the experts who claim that Malone’s interest in DirecTV is not as an operating entity, but is strictly a passive financial play.

Malone couldn’t be reached for comment last week, and EchoStar declined to comment.

But in a press release, Malone said that the DirecTV investment “will create financial, operating and strategic flexibility” for Liberty. The company also said Carey will continue to serve as the satellite provider’s president and CEO.

'ERGENOMICS’

Some analysts are banking that Malone will try to join forces with fellow Denver entrepreneur Ergen. As a merged entity, some experts believe, DirecTV and Dish Network could better compete — and perhaps devise a viable broadband strategy in response to cable’s highly successful bundle of video, telephone service and high-speed Internet access.

“In terms of synergies, it’s hard to imagine two companies who could get more out of a merger than DirecTV and EchoStar,” said Carmel Group chairman Jimmy Schaeffler. “The future would be one of a 900-pound gorilla in the video space, facing two 600-pound gorillas [Comcast and Time Warner] on the bundled side. And that’s why it makes sense.”

In 2002, due to antitrust issues, both the Federal Communications Commission and the Department of Justice effectively put the kibosh on Ergen’s plan back then to merge his EchoStar and DirecTV. And many media analysts on Wall Street, including Craig Moffett at Sanford C. Bernstein & Co. and Thomas Eagan of Oppenheimer & Co., said that the odds today of Washington approving any DirecTV-EchoStar merger haven’t improved.

“The idea that John Malone is going to be able to merge DirecTV with EchoStar is one of those rumors that just won’t die,” Moffett said. “But every single credible voice that has weighed in on this issue has given it an unequivocal no-go … No credible Washington insider has said that a deal can be done.”

FCC chairman Kevin Martin, FCC commissioner Jonathan Adelstein, former FCC commissioner Kathleen Abernathy, and former DOJ prosecutors have all said that such a merger “is not feasible,” according to Moffett.

Schaeffler believes that the DOJ would give its OK to a combined DirecTV-EchoStar now because the phone companies, finally, seem to be getting a real foothold in video.

“The telcos give the DOJ and the FCC an out,” said Schaeffler, who also doubts that Carey has a long-term future at DirecTV.

AT&T ANGELS

In a Dec. 18 report, UBS Warburg analyst Aryeh Bourkoff suggested that AT&T, which is enmeshed in its BellSouth merger, could jump-start its video rollout by buying into a DBS company, and that DirecTV would be the ideal partner.

But Moffett is skeptical about the prospect of Malone selling DirecTV to AT&T. He doubts AT&T would have any interest in purchasing a DBS company, pointing out that the telco already has a current partnership with EchoStar, where they have teamed up on Homezone, a video-high-speed data service.

In a report, Eagan also expressed doubt that Malone would sell to AT&T, noting that Liberty might have to wait two years to do such a transaction in order to avoid paying taxes.

Analysts such as Jeff Wlodarczak at Wachovia characterized Malone’s interest in DirecTV as “a passive investment position.”

In his report, he wrote, “By swapping for DirecTV, Malone gets a massive step up in tax basis and a control stake in an underlevered DirecTV.” The satellite company could add $15 billion in debt, according to the analyst.

'MILKING’ ASSETS

Both Wlodarczak and Moffett predicted that Malone will “lever” DirecTV’s balance sheet to pay out a one-time special dividend. Liberty, obviously, would be a major beneficiary by virtue of its large DirecTV stake.

But Bruce Leichtman, president of Leichtman Research Group, said that Malone understands and will take full advantage of his new valuable asset, even without a merger with EchoStar.

“You’ve got an operator with over 15 million subs, and that’s one heck of a way to start,” Leichtman said. “You’re in a milk-it stage, and there’s nobody better at milking it than Malone.”

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