How to Bet on A Dish and DirecTV Merger

NEW YORK (TheStreet) - The merger of satellite TV giants Dish Network (DISH) and DirecTV (DTV) would likely face more regulatory risks than Comcast's (CMCSA) recent $45 billion effort to buy Time Warner Cable (TWC). Still, there's a chance that Dish and DirecTV could decide the benefits of a marriage would outweigh the risk of going at it alone.

Bloomberg reported on Wednesday that Dish chairman Charlie Ergen recently approached DirecTV CEO Michael White about a possible merger. That interest comes over a decade after the Department of Justice blocked a $26 billion tie-up of the two satellite TV giants.

A possible new-found belief by Ergen that a merger is feasible makes sense in the context of a window of opportunity created in the shadow of Comcast and Time Warner Cable's merger efforts, and a web of consolidation that has run through the wireless business in the past 24 months.

It also indicates a quickly shifting environment for cable and satellite operators as consumers adopt new methods of viewing TV, sports and movie content. It was only a few years ago that Ergen said at a University of Colorado Law School presentation Dish's failed efforts to merge with DirecTV in the early 2000's could have destroyed the company.

Now, as Bloomberg reported, he appears to be testing the waters of a merger.

Ergen controls a significant chunk of Dish Network shares and has been lauded by investors for his savvy management of the company's purse strings. The Dish chairman was also early to spot a shift in communications habits in the U.S., buying up billions of dollars of wireless spectrum across the United States. Ergen stepped down from Dish's management ranks, in part, to help the company build up its wireless assets 

That experience now appears key to any possible merger effort between Dish and DirecTV. As analysts note, the synergies between Dish and DirecTV are immense, running as high as $30 billion in some models. A merger with DirecTV would also allow Ergen to finally deploy the billions he's spent on wireless spectrum, building out a nationwide wireless offering to bundle with satellite TV, a direct challenge to Verizon (VZ), AT&T (T) and Sprint (S).

Dish, after all, emerged as a wild-card in SoftBank's efforts to buy Sprint, and presented a $25 billion takeover plan for Sprint that would have created a lightly leveraged competitor to cable and wireless giants.

Immense synergy between Dish and DirecTV's current satellite TV offerings, and the emergence of a new nationwide broadband offering might present the perfect formula for a hard-fought victory.

"I have nothing to add other than it makes great sense!," Leon Cooperman, head of hedge fund Omega Advisors and a long-time Dish Networks shareholder said in an e-mail to TheStreet. Cooperman has been a strong supporter of Ergen, referring to the Dish chairman as a "genius" in previous interviews and a model steward of shareholder value.

Still, it wouldn't be surprising if Ergen and Dish step back from the ledge of a merger with DirecTV and pursue a different alternative, given the regulatory hurdles to a prospective deal. History has shown that, Ergen, a noted poker player, is ready to test many alternatives for Dish and has the confidence to move extremely quickly.

Antirtust Woes

Craig Moffett, co-head of independent research firm MoffettNathanson, has long speculated upon a merger of Dish and DirecTV. He, however, believes "the odds of a successful merger look very, very low."

Moffett compares the scenario of a Dish and DirecTV merger with a possible merger of Sprint and T-Mobile (TMUS), and not the Comcast and Time Warner Cable deal. That's because Dish and DirecTV directly overlap in many major and rural markets. In contrast, Comcast and Time Warner Cable have virtually no geographic overlap, and in fact, don't operate in any of the same zip codes.

The important point is also that antitrust regulators appeared to quickly quash speculation of a Sprint and T-Mobile tie-up soon after it emerged in the business press. Moffett said the Federal Communications Commission sent "smoke signals" to both carriers that a prospective deal was un-winnable in Washington. Moffett believes a deal between Dish and DirecTV would face the same reaction because it would reduce the number of pay TV competitors in every market in the U.S.

Market concentration issues - the biggest risk facing Comcast and Time Warner Cable's merger efforts - are also greater in a Dish and DirecTV, Moffett said in a Wednesday note to clients. The combination would have as much as 30% more than Comcast and Time Warner Cable, were both companies to merge and is an issue for content suppliers to cable and satellite systems, raising the prospect of undue leverage in carriage negotiations.

For years, however, the value of sports and TV content has risen, indicating it is suppliers who currently have the leverage.

Some issues, such as the concentration of media access to rural markets that killed Dish and DirecTV's merger efforts in 2002, also remain. "We've written for years that the synergies would be staggeringly large... Unfortunately, the odds of successfully completing a merger must be deemed relatively low," Moffett concluded.

Who to Bet On?

Citigroup analyst Jason Bazinet similarly sees large risks to a deal and large prospective benefits, valuing synergies at $30 billion. He prefers a bet on DirecTV to Dish for investors interested in speculating on the prospect of an eventual merger.

According to Bazinet's model, a deal would by definition include a commitment to use Dish's spectrum to build a wireless network, creating $5 billion in cost for the prospective combined company. Applying a 50% discount for regulatory risks, Bazinet said in a Thursday client note Dish could reach a value of $72 a share and DirecTV could reach a value of $84 a share if a deal was announced.

If a deal is approved, Bazinet calculates Dish's stock would reach $85 a share, while DirecTV's stock could go as high as $95 a share, making the latter the better risk-reward for investors who are inclined to play in consolidation stakes. DirecTV has better fundamental's running through its business, Bazinet said, providing some downside protection.

A Different Deal?

Wells Fargo analyst Marci Ryvicker said in a Thursday note to clients it is almost a "fiduciary duty" for Ergen to at least toy with a merger with DirecTV. Still, the analysts wondered whether increased speculation of a merger would generate other options for Ergen and Dish.

"Given its wireless spectrum assets, DISH likely has more "natural" buyers than does DTV," Ryvicker said. "If anything, we think today's headlines might spark those with potential interest in DISH to move more quickly than they otherwise would have."

Dish shares were little changed after surging in Wednesday afternoon trading to over $60 apiece on the Bloomberg report. DirecTV shares were trading at $77.49 in Thursday morning trading.

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