SBC Communications Inc. announced a deal to co-brand EchoStar Communications
Corp.'s Dish Network direct-broadcast satellite service to its telephone
customers in return for a $500 million investment in EchoStar.
The agreement will give SBC exclusive co-branding rights for "SBC Dish
Network" in its 13-state service area. According to a press release, SBC has
about 56 million access lines. SBC anticipates offering the co-branded
television service in early 2004.
The investment is in the form of a 3% convertible note, due 2010, that is
convertible into 6.87 million shares of EchoStar common stock at $72.82 per
share.
Wall’s Street reaction to the deal was lukewarm, with EchoStar stock rising
76 cents each to $36.09 per share in morning trading. SBC shares fell 16 cents
(0.66%) to $24.02 each.
SBC's interest in DBS is no secret. Earlier this year, published reports had
the San Antonio-based regional Bell operating company in talks to purchase the
No. 1 DBS service provider, DirecTV Inc. However, those talks fell through after
investors reacted badly to a possible deal, driving SBC's stock down 14% in
little more than one month.
Last year, EchoStar's attempt to purchase DirecTV parent Hughes Electronics
Corp. was thwarted by federal regulators due to anti-competitive concerns. In
April, News Corp. announced a deal to purchase a controlling interest in Hughes
for $6.6 billion. That deal is still pending.
The co-branding deal will be similar to an existing arrangement SBC has with
Yahoo! Inc. regarding digital-subscriber-line high-speed-data service.
SBC said in the press release that it would manage customer relationships in
the co-branding arrangement, allowing customers to place their orders, arrange
for installation and activate service with a single phone call. In addition,
customers would receive a single bill for their television, telephone and
high-speed-data service.
"For the past several months, we've aggressively looked for the best way to
integrate television into our bundles of consumer services," SBC chairman Edward
Whitacre said in a prepared statement. "This first-of-its-kind milestone
agreement with EchoStar gives us what we've been seeking and puts us in a great
strategic position to compete with any provider -- telecom or cable company --
in the years ahead."
EchoStar will continue to sell its service in SBC service territories, but
the co-branding agreement is expected to give the No. 2 DBS provider a new sales
channel.
"By co-branding SBC and Dish Network services, our customers will have
greater exposure to the benefits of satellite TV with the added convenience of a
bundle," EchoStar chairman Charlie Ergen said in a prepared statement. "With
this partnership, we continue our efforts to make Dish Network even more
competitive with cable-TV providers."
Longer-term, SBC and EchoStar will work together to develop technology to
create new service bundles, including home networking.
In a research note, UBS Warburg LLC cable debt and equity analyst Aryeh
Bourkoff said that while deals of this nature have not worked in the past, the
SBC/Dish agreement could give SBC an advantage because it would enable it to
price the bundle aggressively and it could force cable operators to more
aggressively deploy telephone service.
