Dish Network's Earnings Revive DirecTV Deal Talk

NEW YORK ( TheStreet) -- Dish Network ( DISH) surprising third-quarter loss signals that the satellite TV giant's subscribers continue to leave in favor of alternative cable and wireless contracts. The miss may also put the company in a better position to retry a merger with DirecTV ( DTV), according to industry analysts.

After antitrust regulators nixed a 2002 merger effort between the nation's top two satellite TV providers, analysts now say Dish Network's weak third quarter earnings put the company and its chairman Charlie Ergen in a better position to broker a tie-up, which could help both companies develop mobile broadband services to better compete with cable providers and national carriers like Comcast ( CMCSA), AT&T ( T) and Verizon ( VZ).

Such speculation comes amid a complicated merger dance in the wireless industry that, in October, reshaped outlook for many telecom sector giants.

It also might add a new twist to the relationship between wireless carriers and cable and broadband service providers. Earlier in 2012, Comcast, Verizon and Time Warner Cable ( TWC) were approved to cut a spectrum deal that paved the way for cable companies to offer their services in wireless contract bundles and vice versa.

For Dish Network, at issue is whether satellite TV providers can compete in an environment where an increasing number of consumers are switching to multi-service wireless, Internet, telephone and cable contracts provided by the likes of AT&T and Verizon.

Meanwhile, Dish Network is sitting on spectral assets that may soon be approved for development by government regulators, and which may play a role in increasing overall U.S. wireless sector capacity, as a smartphone data crunch begins to emanate from Apple ( AAPL) iPhone and Google ( GOOG)-Android powered devices.

Craig Moffett of Bernstein Research sees Dish Network's weak earnings as reviving the prospect regulators might allow a merger between it and DirecTV, citing the tenuous positioning of satellite TV providers and the prospect that a merger might give Dish Network the resources to develop its wireless assets into a mobile broadband network.

In a quarter marked by an unexpected loss, Moffett writes the silver lining is, "Dish's weak results in the core business are in fact a selling point to regulators for a merger with a much stronger DirecTV," in a Tuesday note to clients. He sees both company's slow growth, weak service offerings and the prospect that they team up on wireless broadband as reasons regulators might be amenable to a deal.

In third-quarter earnings, Dish Newtork reported a net loss of $158.5 million, which included litigation expense of $730 from a carriage dispute with AMC Network ( AMCX), and 19,000 net subscriber losses. While Dish's loss was worse than the $251 million in profit analysts polled by Bloomberg had expected, subscriber losses were roughly half of forecasts - signaling to Moffett that the company ate big costs to retain customers.

Also on Tuesday, DirecTV missed earnings estimates, reporting a profit of $565 million, or 90 cents a share -- less than the 92 cents a share analysts polled by Bloomberg had forecast. Revenue of $7.4 billion met analyst estimates, but 543,000 subscriber additions fell slightly short of estimates.

For Moffett, who called DirecTV's earnings "encouragingly boring", the big question is what happens next for it Dish Network after earnings unveil negative core satellite TV trends and telecom sector consolidation has limited some M&A options with traditional wireless carriers.

"While approval of a merger attempt wouldn't be a slam dunk by any stretch, we believe the DOJ and FCC would ultimately conclude that the pro-competitive benefits of a jointly-developed and marketed wireless offering would outweigh any anti-competitive risks of going from two to one video provider in rural America," adds Moffett.

While Dish Network shares appear expensive in Moffett's perspective, the analyst sees DirecTV as a better way for investors to play prospective consolidation. "A merger would be a boon to both," he adds.

Dish Network has played a front and center role in wireless industry consolidation, which picked up pace with AT&T's failed $39 billion bid for T-Mobile USA in 2011 and recent multi-billion dollar merger efforts between T-Mobile and MetroPCS ( PCS) -- and Sprint ( S) and Softbank of Japan.

The key is that after stepping down as chief executive of the company he co-founded, Dish Network chairman Charlie Ergen has spent billions combing bankruptcy courts for spectrum assets, which have turned him to a key figure in wireless industry consolidation.

In August, TheStreet profiled Dish Network, large investors in the company and analysts on the possibilities for Ergen's wireless ambition

After a weak third quarter earnings report marked by falling average revenue per user and costs related to the company's Blockbuster acquisition, Bryan Kraft of Evercore Partners reiterated the boutique investment bank's 'overweight' rating on Dish Network shares and $41 price target, which hinges on a sum-of-the-parts analysis that assumes the company will either be sold or divest its spectrum assets.

Already, Ergen has hinted that he might revisit a merger with DirecTV, after the blocked 2002 effort hit the company's finances. As AT&T was seeking approval of its $39 billion T-Mobile merger bid, Ergen said a regulatory approval of that deal would pave the way for a Dish - DirecTV tie-up. "If that merger is allowed to go forward, then I don't think there'd be any problem with us merging with DirecTV," Ergen said a year ago, on a third quarter 2011 conference call with analysts.

Meanwhile, Hollywood Reporter reports DirecTV CEO Michael White said the company could wireless revisit a merger with Dish Network at Goldman Sach's Communacopia Conference in September, given the consumer benefits of a tie up.

Still some risks to M&A speculation remain. Bloomberg reported in June the Department of Justice has begun to look into pricing arrangements between Dish and DirecTV. Meanwhile, Dish recently settled a bitter carriage dispute with AMC Network, which some said raised the prospect that Ergen could fall out of favor with regulators who'd be key to any M&A efforts. Already, Ergen has complained a slow regulatory approval process has hampered the company's wireless efforts and given potential competitors like AT&T a big head start.

While Dish Network's M&A fortunes have changed dramatically since the summer amid a frenetic pace of carrier mergers, analysts continue to see the company as a key player in wireless industry consolidation. To be seen is how that might take form.

-- Written by Antoine Gara in New York

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