Markets & Finance

Investors Warm to DISH Merger Reports


The latest news from investors: There may soon be a wedding in the satellite TV industry. Shares of satellite television provider EchoStar Communications (DISH), the name behind DISH Network, have soared amid speculation about the possibility of a merger with archrival DirecTV (DTV). But even with the stock reaching a 52-week high of $34.43 on July 27, the company still faces fierce competition, and some analysts remain pessimistic.

During Herbert Allen's annual media-mogul summit in Sun Valley, Idaho, earlier this month, a flurry of press reports and hints from involved parties suggested a possible deal between the companies. Citigroup analyst Jason Bazinet summed it up in a July 19 report, in which he upgraded EchoStar, generally regarded as the low-cost satellite provider, from sell to buy. He also raised its price target by 50% to $39 on the basis of a potential merger. (Citibank makes a market for EchoStar and has a business relationship with DirecTV).

OPEN TO MERGERS. There's a good reason to be skeptical that such a deal could take place. In 2002, the Federal Communications Commission (FCC) turned down a proposed tie-up between the companies on the basis that it would be anti-competitive. At the time, the argument was especially relevant to areas where customers did not have the option of subscribing to cable and needed satellite to receive a broad range of channels.

Though a deal between the companies is only speculation, the environment might be more conducive to a merger than it was in 2002. Since the Idaho summit, News Corp. (NWS) and DirecTV Chairman Rupert Murdoch told talk show host Charlie Rose that the deal could win FCC approval, given the options available for receiving video in the home. Both companies declined to comment for this story.

Ron Cowles, an analyst with Gartner, is inclined to agree. "Things are lining up a lot better than the last time," he says. The commission will have to compare EchoStar and DirecTV with all of the companies that provide, or will soon provide, similar video services—including cable and telephone outfits. In 2002, the commission had to weigh the two primarily against each other.

A STRONG STOCK. The communications industry is "ripe for consolidation," Cowles says. "There are too many players." He points out that the commission consists of three Republicans and two Democrats, and this would likely favor the deal as well.

The current feeling is that "big is basically getting bigger" says Standard & Poor's equity analyst Tuna Amobi, though he remains unenthusiastic about EchoStar. The FCC recently approved a bid from cable companies Time Warner (TWX) and Comcast (CMCSA) to split the assets of defunct Adelphia Communications. Advocates of that deal say it will speed up the cable companies' ability to roll out high-speed Internet and telephone services to customers.

Amobi calls the recent run-up of EchoStar stock an "unwarranted premium" that is unrelated to the company's fundamentals. He rates the stock a strong sell, with a $25 price target. "We don't even know if the companies are talking yet," he cautions.

LOSING ALLURE. Like Amobi, Citigroup's Bazinet remains unenthusiastic about satellite television as an industry; he downgraded EchoStar to sell in January before the recent upgrade. Aside from how EchoStar would benefit from a merger, he sees an upside for investors, even in the event of a failed merger. "In the intervening months—between a potential merger announcement and the subsequent regulatory review—EchoStar's shares could outperform," he writes.

Satellite may lose even more of its appeal, as consumers increasingly demand TV, phone, and Internet services from a single provider. A Bear Stearns report says satellite is "structurally challenged (vs. cable) given its inability to offer a bundled package of communication services." Citigroup chimes in, saying that they face "acute risks of slower subscriber growth and higher churn [customer turnover]."

Video service from both EchoStar and DirecTV can be bundled with voice and Internet services from other companies. However, just contributing video could be a tenuous position, as more consumers gain access to so-called "triple play" packages from a single provider.

CONTINUING COMPETITION. As a result, the satellite companies may be branching out. Fueling acquisition rumors, both outfits are listed among the owners of Wireless DBS, an entity that could bid in an upcoming FCC auction of "advanced wireless services," which could boost their presence in high-speed Internet delivery. The regulator's Web site lists the application as "incomplete."

Before the merger buzz, the shares were floundering. In 2005 the stock fell on the year to $27.18 from $33.22—even though DISH added some 1.1 million customers and saw a sharp boost in net income to $1.5 billion, on 18% higher revenues.

In the annual report for the year, Chairman Charles Ergen attributes the stagnation in the share price in part to tough competition. With cable and telephone rivals growing increasingly bold, the competition is likely to get even tougher—and EchoStar may yet want to consider synchronizing its orbit with DirecTV.


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