Media

Why Dish Will Be Forced Into Action After DirecTV-AT&T Merger

The news is out that AT&T Inc. (NYSE: T) is formally buying DirecTV (NASDAQ: DTV). The real question now is how exactly this influences the other media and telecom giants. Dish Network Corp. (NASDAQ: DISH) Chairman Charley Ergen has more than hinted about merger possibilities, one of which was potentially with DirecTV. Ergen has also more than hinted that Sprint Corp. (NYSE: S) or T-Mobile US Inc. (NYSE: TMUS) could be “partners” of a sort.

24/7 Wall St. is operating under the assumption that a DirecTV and AT&T tie up is not just a game-changing event for the convergence of media and communications. It seems relatively certain now that Ergen will have to strike out for a deal on his own — and sooner rather than later.

We looked around for outside commentary on the matter. Reports from Oppenheimer and from Credit Suisse analyze some of the opportunities and possibilities here.

Credit Suisse said point blank:

We’d be surprised if Charlie Ergen sat on the sideline for long. He recently said he couldn’t compete with AT&T for DirecTV, but we believe he could get involved. The announced transaction could give him some leeway with regulators and if nothing else, a higher bid would force the price up on AT&T. He could also become more willing to negotiate a deal with Verizon. Finally, he could look to acquire T-Mobile or partner with T-Mobile or Sprint to build a wireless network.

Credit Suisse’s take is also that this AT&T-DirecTV deal could be a catalyst that causes Dish to act sooner rather than later. The firm also said that discussions with T-Mobile could push Sprint into making a move.

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Oppenheimer said that the total consideration was $5 per share less than expected, but the transaction will be weighted more heavily in equity. The firm is targeting about 10% accretion to future free cash flow per share in 2016. Oppenheimer’s take states:

We see this transaction as positive for T-Mobile (a more attractive acquisition target), but negative for Dish, Comcast, Sprint, RLECs and other cable companies. We don’t see any major regulatory issues with this transaction.

Raymond James also likes the existing AT&T and DirecTV deal. The firm raised AT&T to Outperform in the call.

So, here is the rub on Dish Network and Charley Ergen. Dish shares fell 2.4% to $58.53, and the consensus analyst price target is currently $60.55. This implies that Wall Street thinks the company’s standalone value per share is close to being full. Its market cap is almost $27 billion after this last drop. T-Mobile’s market cap is also just under $27 billion, versus $36 billion for Sprint. T-Mobile is effectively just a U.S. tracking stock for Deutsche Telekom’s U.S. assets, and Sprint is now effectively a tracking stock for Softbank’s U.S. assets.

Lastly, Verizon Communications Inc. (NYSE: VZ) will have a hard time getting involved here. The company just had the largest bond offering of all time in 2013 to pay off Vodafone Group PLC (NASDAQ: VOD) for the rest of its Verizon Wireless stake. Could Verizon get involved just because?

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AT&T has been going after video customers with its U-verse. Verizon has targeted video customers with its FiOS offering. Verizon recently said that FiOS revenues surpassed $3 billion in first-quarter 2014, via totals of 6.2 million FiOS Internet and 5.3 million FiOS Video connections at the end of the quarter. AT&T recently said that U-verse’s total revenues (including business) are now a $13 billion annualized revenue stream with a total of 10.7 million subscribers (TV and high-speed Internet) in service.

Dish Network said with its most recent earnings report that it closed its first quarter of 2014 with 14.097 million pay-TV subscribers, compared to 14.092 million of them at the end of the first quarter 2013. DirecTV’s acquisition statement represents that it provides digital television service to more than 20 million customers in the United States and more than 18 million customers in Latin America.

Time is ticking for Dish Network to do something.