Dish Network chairman Charlie Ergen said Thursday that the satellite TV business would “melt away” without a merger between his company and DirecTV, but in addition to boosting that dying industry for a few more years, a merger could possibly serve another purpose -- funding Dish’s $10 billion wireless buildout.
Ergen’s prediction that a DirecTV deal is inevitable has almost become a quarterly tradition. But continued speculation that a deal was more likely to happen now than ever -- fueled by dramatic subscriber declines at both companies -- helped drive Dish stock up by more than 11% Friday and 16% in the past two days. That helped erase the stock’s 2022 decline -- it was down 15% since December 31. But it’s still a long way from the $45 per share range the stock was trading at just five months ago.
It’s been clear for years that Dish and DirecTV are basically shells of their former selves, and Dish shedding 273,000 video customers in Q4 -- well ahead of analysts’ consensus estimates -- is more proof that the satellite business needs help. Even Ergen seems to believe that time is quickly running out for the business.
“I think it's inevitable that Dish and DirecTV go together,” Ergen said Thursday during Dish’s Q4 earnings conference call with analysts. “Otherwise, both companies will just melt away, and there'll be no service for customers. The regulatory reasons to not allow it, don't exist anymore.”
While there has been a lot written about the possible synergies associated with a DirecTV merger, Barclays Group media analyst Kannan Venkateshwar took a look at whether a deal could help Dish fund its $10 billion wireless network buildout. His conclusion: while regulatory hurdles are fewer, it will all come down to valuation.
Dish has repeatedly said it will cost about $10 billion to build its 5G wireless network, and said Thursday that it expects capex to more than double this year to $2.5 billion from $1 billion in 2021 to pay for the network. Dish is expected to launch its first wireless market -- Las Vegas -- soon and revealed another 25 cities, including Dallas, Nashville, St. Louis and Oklahoma City, that will receive service in the coming months. Still, delays associated with difficulties surrounding integrating equipment and software from different vendors, and a snag regarding 911 emergency service have pushed back the buildout schedule.
“We’re six months behind where we thought we’d be, and it’s my fault,” Ergen said on the conference call. “We just didn’t anticipate that we would have to do as much on the technical side.”
And though analysts have said in the past they believe the $10 billion buildout figure is surprisingly low, Ergen stressed that because its network configuration is different than any other provider -- he said it was more of an IT network than a wireless network -- the number is valid.
“Because we're in the cloud, we can automate and do things and provision and other things that people can't do,” Ergen said on the call, adding that its labor costs are lower, too.
But it still is going to cost a lot. Analysts have noted that the $10 billion figure does not include tower leases for the service. In a research report, MoffettNathanson senior analyst Craig Moffett wrote that Dish has commitments for about $12.7 billion in tower leases, which is in addition to the $10 billion construction budget.
So where is Dish going to get the money for that? Ergen has said that funding is readily available, but some have wondered whether the source could be a merger with DirecTV.
In January, the New York Post reported that Dish and TPG were in talks concerning a DirecTV merger deal, but so far neither side has confirmed that and there are no signs that a deal is close.
Dish and DirecTV tried a merger before -- in 2001 -- but were blocked by government regulators (opens in new tab) who said a deal was anticompetitive. But the landscape has changed dramatically since then -- DirecTV and Dish combined have about the same number of TV customers that DirecTV alone had five years ago. But are still roadblocks to a combination.
Venkateshwar also believed that regulatory challenges are fewer -- and could be even less if the government decided to impose broadband deployment conditions to a deal for both parties. AT&T already is committed to building out fiber broadband to rural markets. And Dish’s wireless offering is mainly targeted at smaller cities. Requiring the two expand their rural broadband footprint as a condition of a deal seems like a no-brainer.
But what could derail a satellite TV deal, according to Venkateshwar, is valuation.
The analyst pointed to AT&T’s sale of a 30% stake in DirecTV to private equity group TPG Capital, a deal that valued the satellite giant at $16.25 billion, about one-quarter the $65 billion AT&T paid for the asset back in 2015. And though he wrote that synergies in a deal could be significant -- between $1.5 billion and $2 billion -- valuation is where a transaction could hit a snag.
Venkateshwar estimated that the TPG deal valued DirecTV at about 3 times forward looking cash flow, but said the actual valuation could be lower considering non-cash fulfillment costs.
“At these valuations, the deal will not make sense for Dish given the debt attached to its own DBS assets, as there may not be any equity value left at 3x EBITDA even including synergies,” Venkateshwar wrote. “A big difference in valuation between DTV and Dish would risk Dish implicitly walking away with a large part of the deal synergies and potentially future cash flow (if Dish continues to be an investor) in the combined company.”
That could be a problem for AT&T because its free cash flow guidance of about $20 billion pro forma for its WarnerMedia merger with Discovery relies on $1 billion in free cash flow from DirecTV.
“This is why the transaction parameters may be difficult to narrow down, especially given Dish Chairman Charlie Ergen’s proclivity for an all or nothing approach to deal making and Dish’s own need for capital,” Venkateshwar wrote.
There could be other deal structures, including having TPG invest in Dish prior to the assets being combined, or, like the WarnerMedia/Discovery transaction, Dish could split off the satellite TV assets before combining them and spinning it off to shareholders.
“However, all these deals will require some flexibility from Dish to meet mid way to satisfy AT&T’s strategic needs, something that is not a given,” Venkateshwar wrote.
Dish could just sell the satellite TV asset outright and pocket the cash, but Venkateshwar added that, too, isn’t as easy as it sounds.
For starters, selling off the satellite TV business would remove a big cash generator for Dish, leaving it with a wireless business that isn’t generating as much revenue as its current free cash flow take. enough revenue
“While the balance sheet would be much lighter in theory, raising further capital to fund its wireless business without any cash generating asset could become expensive,” Venkateshwar wrote. “This is why Dish will likely want a much higher valuation if it has to sell out of the asset, which is likely to make the deal less attractive for AT&T. This framework in essence highlights the challenges in negotiating the deal even absent regulatory issues.”
MoffettNathanson senior analyst Craig Moffett has said that a DirecTV merger would be good for both companies in the past, but he isn’t convinced it’s possible. Moffett wrote in a Thursday research note that a merger really depends on synergies, and given Dish’s gross subscriber additions, there aren’t many to be found in a combination of the two.
“A merger wouldn’t allow for consolidation of satellite fleets, nor would it change industry growth rates, but it would reduce the activity levels required to achieve those growth rates by cutting churn, and gross additions, roughly in half,” Moffett wrote. “But with gross additions this low, there isn’t much synergy opportunity left here.”
Nevertheless, Dish stock was up 11% Friday, in part because of merger speculation but also because Ergen offered more details on the wireless rollout and the apparent resolution to another dilemma -- T-Mobile’s decision to shutter its 3G CDMA network, the very platform over which most of Dish’s Boost Mobile customers receive service. Ergen said that T-Mobile will shut off the CDMA service on March 31, and that the two are working together regarding communications, handset supplies and incentives. That should make some investors happy.
For the rest, Dish plans to hold an Analyst Day on May 10 -- its first in about 15 years -- where it hopefully will address any remaining doubts and questions. In the meantime, the stock continues to be fueled by what Dish might do, not necessarily what it is doing. ■
Mike Farrell is senior content producer, finance for Multichannel News/B+C, covering finance, operations and M&A at cable operators and networks across the industry. He joined Multichannel News in September 1998 and has written about major deals and top players in the business ever since. He also writes the On The Money blog, offering deeper dives into a wide variety of topics including, retransmission consent, regional sports networks,and streaming video. In 2015 he won the Jesse H. Neal Award for Best Profile, an in-depth look at the Syfy Network’s Sharknado franchise and its impact on the industry.
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