Sling, Split Fuel EchoStar

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EchoStar Communications stock soared Tuesday after the satellite TV giant said it would acquire Sling Media for $380 million and is pondering a split of its technology assets into a separately publicly traded company. Analysts who follow the company cheered the deal, claiming it could clearly differentiate EchoStar’s Dish Network DBS service from competitors, but added that the deal may have a greater impact on the company in the longer term.   

EchoStar shares were up by more than 6% ($2.68 cents each) to $44 per share in afternoon trading Tuesday.

Last night EchoStar said that it had agreed to purchase Sling Media – maker of the Slingbox, a device that allows subscribers to view cable and satellite programming away from their homes on their personal computers – for $380 million in cash and stock options. The deal is expected to close in the fourth quarter of this year.

And earlier this morning the company said it was contemplating splitting its non-DBS technology assets – including its set-top box manufacturing arm, its international operations, and assets used to provide fixed satellite services to third parties, together with satellites, uplink centers and spectrum licenses not considered core to Dish Network’s subscriber business – into a separate public company.

In a research note, Sanford Bernstein cable and satellite analyst Craig Moffett viewed the Sling purchase and the spin-off as positives.

“An ‘anywhere’ value proposition for consumers has the potential to position EchoStar's service offering as genuinely differentiated,” wrote Sanford Bernstein cable and satellite analyst Craig Moffett in a research note. But Moffett warned that EchoStar’s lack of a broadband product could hurt it in terms of the Sling Media product.

“Reliance on Sling Media for differentiation is not without risk, however, given Sling’s inherent reliance on a truly high-speed broadband connection,” Moffett wrote. “Increasingly, those broadband connections are likely to belong to cable operators, or, in parts of the country, to telcos offering their own video services. Legacy DSL, which is most commonly paired with DBS today, will in many cases be inadequate to deliver a high quality user experience with Sling.”

Oppenheimer cable and satellite analyst Tom Eagan said in an interview that the separation of the satellite assets could provide a vehicle for EchoStar to pursue a broadband play, either through investment or through acquisition.

“At the very least it will help the overall company to make new investments without having to dilute the retail shareholders,” Eagan said. “They could make other investments and put them on the tech balance sheet. It would make it easier for them to make an investment in broadband and then the retail side could lease it from the wholesale side.”

So far, EchoStar has backed off on creating its own broadband service to compete with cable and telephone companies, opting instead to focus on the video side – through HDTV offerings – and lower prices. The creation of the technology spin-off could signal a change in that focus.

The acquisition of Sling Media also could mean that EchoStar could eventually incorporate the technology into its own set-top box and sell it to cable operators and telcos, but Eagan said that may be something that happens further in the future.

“I wouldn’t be surprised if they want to use this to increase subscribers, to decrease churn,” Eagan said, adding that while a Sling-enabled set-top may have some attraction for other pay TV service providers, existing vendor relationships may prevent any deals from happening.

“Certainly in the past, cable operators likely would not want to be customers of EchoStar,” Eagan said. “With a separation it would be a little bit more palatable, but they [cable] already have their own vendors.”

Bear Stearns media analyst Spencer Wang agreed that the spin-off would allow EchoStar to make investments without burdening the balance sheet of its retail satellite TV business. But the analyst added that the separation could also allow EchoStar CEO Charlie Ergen “to keep a separate company that he could run and expand if he were to sell/merge the consumer business.”

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