Exploratory merger talks between satellite TV operator EchoStar Communications (DISH) and telecom giant AT&T (T) appear to signal a shift in strategy for EchoStar Chairman and Chief Executive Charles Ergen. In the past, Ergen has insisted on control of his company, but there are signs he might be open to change.
Shares of EchoStar have been rising amid speculation that the company could be acquired by AT&T. EchoStar, which operates Dish Network, rose 45 cents, or 1.6%, to $28.95 on Jan. 6. While the shares are still 15% below their 52-week high, they have rallied 9% since mid-December, when stock analysts first started to speculate about a possible deal. Rumors heated up during the past two weeks, according to tech analyst Susan Kalla of investment company Caris & Co.
The talks began at the behest of Ergen, according to a person familiar with the matter. Discussions have failed to progress because senior executives at AT&T, formerly known as SBC Communications, aren't interested, according to that same person. Spokesmen for EchoStar and AT&T declined comment.
IFFY INDEPENDENCE. The obstacles include price and other issues. AT&T was recreated last year when SBC closed its acquisition of AT&T and adopted the AT&T name. AT&T CEO Ed Whitacre has a lot on his plate, including the continuing integration of wireless unit Cingular and the former AT&T Wireless. An EchoStar deal, which would cost at least $13 billion, plus the assumption of about $6 billion in debt, would be a lot, even for acquisition-hungry Whitacre.
EchoStar's future as an independent company is less assured than in the past. The market for pay TV is getting more competitive all the time. Cable companies have an edge when it comes to new products such as high-speed Internet access and Internet-based phone service.
Plus, telecom companies such as Verizon Communications (VZ) are building high-speed fiber lines that carry voice, video, and superfast Internet connections that could blow away current cable modem and DSL products (see BW Online, 11/07/05, "Rewired and Ready for Combat").
WHO'S NEEDING WHOM. And the Internet is emerging as a legitimate means of delivering TV sold on a pay-per-view basis, bypassing cable and satellite systems (see BW, 01/16/06, "Old Media's Mobile Future").
EchoStar needs AT&T more than AT&T needs EchoStar. The two companies already have a marketing agreement. And by 2008, AT&T plans to offer voice, TV, and Internet over speedy fiber lines to 18 million of its customers.
EchoStar is a relatively small, independent company. Satellite TV service DirecTV Group (DTV), its nearest rival, is part of the huge, global, Rupert Murdoch empire, which includes film, TV, publishing, and Internet properties. EchoStar has no cushion against troubles in its core market, making it harder for it to remain independent.
CONTROL ISSUES. Ergen, who owns the majority of voting shares, balked at a merger with Murdoch's News Corp. (NWS), which operates DirecTV (see BW, 11/01/04, "Can Charlie Ergen Still Go It Alone?"). His controlling stake is another impediment to a deal.
There's no obvious exit strategy for Ergen. Other buyers are unlikely to appear. One option is simply to wither, Kalla says. The other: go back to Murdoch and revisit the possibility of a merger between the two satellite giants. But Ergen is unlikely to reap as much money as he wants. And there's no way Murdoch would let Ergen keep control.
Since he has coveted his independence for so long, it may be too late for Ergen to change his mind.