Rupert Murdoch is selling DirecTV (DTV), and it may be time for stockholders to do the same.Shares of the U.S.'s leading satellite TV provider almost doubled in price last year amid better-than-expected profits and widespread speculation that an M&A deal was in the works. Now, with Murdoch's News Corp. ( NWS) dealing its stake in DirecTV to John Malone's Liberty Media ( LCAPA), such speculation is poised to die down for a while -- or at least until the transaction closes midway through 2007. Meanwhile, Murdoch's willingness to part with the company may be a sign that a favorable merger deal for DirecTV is unlikely, and the new bundled service offerings from cable and phone operators could zap its ability to compete for subscribers. "Ultimately, the satellite model has challenges in competition with the cable and telecom industry as they leverage the ability to sell TV, phone and Internet service all together in one bundle," says UBS analyst Aryeh Bourkoff. "2007 is the year that the bundle shows real results across the board for those that have it, and DirecTV won't have it." Bundled offerings from cable operators, such as Time Warner's ( TWX) so-called Triple Play, enabled the traditional cable industry to enjoy subscriber growth in 2006 for the first time in years. At the same time, satellite providers DirecTV and EchoStar's ( DISH) DISH Network have seen their subscriber growth slow.
In an effort to compete, DirecTV has formed partnerships with phone companies such as Verizon ( VZ) and Qwest ( Q) to combine service offerings. Investors have speculated that larger deals could be in the works to strengthen the company's competitive position, such as a merger between DirecTV and DISH or an alliance between DirecTV and AT&T ( T), but some say such deals are unlikely because the current political climate is less welcoming toward mergers of big rivals. "It will never happen because it doesn't work from an antitrust perspective," says Kaufman Bros. analyst Todd Mitchell about the prospect of a merger between the two satellite operators. "From a political perspective, rural America is disproportionately powerful. If you think Democrats are going to let Rupert Murdoch or John Malone get control of what amounts to the only multichannel television offering in Red State America, you've got another think coming. "Murdoch floated the idea and rapidly discovered that the Bush Administration had lost its power and the Republican Congress had lost its discipline, and there was no way he could get it done," adds Mitchell. "That's probably why he was willing to get rid of the asset." To be sure, Murdoch had his own reasons for dealing DirecTV to Malone. He sold his company's 38.5% stake in the company in return for Malone's 16.3% stake in News Corp., which was viewed as the only threat to Murdoch's grip on the media empire he created. With Malone out of the picture, Murdoch can now drop News Corp.'s so-called poison pill policy that the company adopted as a takeover defense when Malone accumulated his stake two years ago.
Analysts say DirecTV's competitive position won't change. Its CEO, Chase Carey, will stay in place, and its premium satellite TV service to 15.7 million subscribers will continue. Its capital structure, however, may shift. Liberty's ownership of DirecTV will loosen its financial policies, analysts say, allowing the company to take on large amounts of debt and return cash to shareholders through a dividend or stock buyback. In that scenario, the company's focus could shift to growing its cash flows instead of its subscriber base. Already, DirecTV has taken pains to tighten its credit policies to cut down on the number of high-risk customers who didn't pay their bills. It has focused on winning over deep-pocketed customers with its high-definition offerings and digital video recorders. In its third quarter, the company's average monthly revenue per subscriber rose to $72.74 from last year's $68.65. During that quarter, profits almost quadrupled to $370.2 million, or 30 cents a share, beating Wall Street's expectations. Its revenue was up 13% to $3.67 billion, even while its subscriber growth slowed to 165,000 net new subscribers in the U.S. from 265,000 added in the year-ago period. Its average monthly churn rate, which measures the number of subscribers who cancel their service, was higher-than-expected for the quarter at 1.8%, showing more evidence of the competitive threat from the cable industry. Under Liberty Media, DirecTV may ease its hunt for subscribers and focus on holding customer churn rates steady to grow its cash flows, but such a strategy might prove to be a boon for competitors.
"The more that DirecTV is focused on cash flow instead of subscriber growth, the more share of the new subscriber market that cable operators will be able to grab," says Thomas Eagan, analyst with Oppenheimer & Co. And while taking on debt may hold short-term appeal for DirecTV shareholders, analysts say that at 18 times Wall Street's earnings estimates through 2007, DirecTV's share price probably already has those benefits priced in at this point. In the long term, more leverage might spell trouble for the company. "Murdoch brought a lot more to the table at DirecTV from a strategic perspective than Malone will, and if Malone levers this thing up, you'll be left with a much less dynamic entity," says Mitchell, who holds a neutral rating on the stock. "I'm inclined to say this stock has already had its run. The easy money has been made, and it probably has a bias to the downside at this point."