Is Dish a DBS builder or seller?

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Craig Moffett, senior analyst at MoffettNathanson, has taken a long look at the prospects for Charlie Ergen’s Dish Network, in particular with the ON/OFF reports of a potential tie-up or consolidation with AT&T’s DirecTV unit.

Moffett examines the complete background in an impressive 42-page report and which looks at Dish’s current plateful of burdens: Spectrum acquirer, Network builder, Sprint/T-Mobile merger and its impact on Dish, bandwidth plans… and then says: “Oh, and wait! We forgot the satellite business! Can it be merged with DirecTV? How fast will it decline? What are we to make of their constant blackouts (most recently, a new one with Fox)? Will it eventually go bankrupt? What happens if it does? And when?”

Moffett admits that these massive variables are difficult to distil into a financial model. “It’s our view that the incredible complexity of the event tree for Dish Network is grossly underappreciated. While it would be folly to model each possible branch, we continue to believe that the downside risks vastly outweigh the upside opportunity. We reiterate our Sell rating for Dish Network and, in this report, make the case that our $30 target may be (much) too high.”

He examines the question of Dish merging with DirecTV, saying: “AT&T has reportedly shown some interest… but not much (they have, most recently, poured cold water on the idea, claiming that DirecTV is a critical piece of what they are trying to build). Would a merger be possible from a regulatory perspective? If yes, what kind of synergies could be generated? And, perhaps most importantly, would a merged DirecTV/Dish Network be financeable?”

“Or is that even the right question,” he asks. “Dish is already a more complicated story than most in that it houses two almost completely separate businesses, and those two businesses are in entirely different places: one is in steep secular decline, the other – depending on who you ask – is either a collection of assets that could eventually be sold or is an operating business that hasn’t even launched yet.”

“AT&T has most recently said they aren’t planning on selling DirecTV, and that DirecTV is still central to their plans. And that may be true… for now. But that could change. A better question is, would it be allowed? AT&T and Dish Network have both raised questions about regulatory feasibility, so that’s as good a place to start as any.”

A merger between Dish and DirecTV wouldn’t just generate real synergies it would very likely also lead to Dish separating its spectrum from the DBS business after all, leaving the bankruptcy risk of the DBS business – with or without DirecTV – to the creditors… and the spectrum to the equity holders,” Moffett suggests.


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