Charlie Ergen went almost three years without an acquisition after splitting up his satellite- television empire in 2008. Since December, he has cut five deals and may soon have a sixth.
Ergen is seeking to push his Dish Network Corp. (DISH) TV provider and EchoStar Corp. (SATS) equipment company into Internet and on-demand services, said Chris Marangi at Gamco Investors Inc. Dish, where Ergen is chairman and chief executive officer, won an auction this week for bankrupt Blockbuster Inc.’s movie-rental business, beating out Carl Icahn and others with a $320 million bid.
“Charlie needs to find other ways for the business to grow,” said Marangi, a portfolio manager at Rye, New York-based Gamco, which owned 5.4 million Dish shares as of Dec. 31. “He’s trying to look around the corner and figure out where he wants to be.”
Ergen, the 58-year-old billionaire who made his fortune building EchoStar after helping found it in 1980, has struggled in recent years to compete against DirecTV (DTV), cable providers like Comcast Corp. (CMCSA) and telephone companies such as Verizon Communications Inc. (VZ) that now sell television service.
DirecTV, the largest U.S. satellite-TV provider, has a leading position in premium video and sports that has crimped Dish’s revenue growth and profit, Marangi said. Meanwhile, companies such as Verizon and Comcast offer faster Internet connections that appeal to the growing number of people who watch video online from Netflix Inc. (NFLX) or Hulu LLC.
Dish’s primary business remains providing pay television via satellites in the U.S., where it is second-largest behind DirecTV. EchoStar, which sells set-top boxes and satellite services, is still linked with Dish, getting about 80 percent of revenue from the Englewood, Colorado-based company. Ergen and his family hold majority voting power in both companies.
Dish wouldn’t make Ergen available for comment and declined to discuss its acquisition strategy, said Marc Lumpkin, a company spokesman.
At the time of the split, Ergen said it would increase the value of the companies and help finance expansion. Dish shares have fallen 28 percent since the separation at the beginning of 2008, while DirecTV’s more than doubled. EchoStar rose 4.2 percent in the same period.
Dish’s subscribers fell by 156,000 last quarter to 14.1 million, the company’s worst quarterly performance ever.
Ergen is shifting his strategy as consumers change their viewing habits. His deal spree may help him appeal to people who want to watch video over the Internet and at times they choose, rather than fixed time slots, said Todd Mitchell, a Kaufman Bros. analyst.
“Dish is thinking, ‘What do I need to do to change myself from being a broadcast platform to being an on-demand platform?’” said Mitchell, who is based in New York and recommends buying the stock. “The media model for distribution is changing.”
EchoStar in January bought Move Networks Inc., which makes technology for streaming video online, and in February said it would spend $2 billion for Hughes Communications Inc., which provides speedy satellite Internet service. Dish in December acquired Liberty-Bell Telecom, a small telephone and broadband company based in Denver, and in February agreed to pay $1.4 billion for the bankrupt DBSD North America Inc., a satellite company that provides voice and data services.
A bankruptcy court judge approved Dish’s Blockbuster bid yesterday. Ergen may look north for his sixth deal. EchoStar made an offer for Telesat Holdings Inc., the Canadian satellite company, people familiar with the matter said last month.
Hughes and DBSD may let Ergen offer a bundle of satellite TV, broadband Internet and wireless services to compete with Verizon, AT&T Inc. (T) and cable providers, said Amy Yong, an analyst at Macquarie Securities in New York. Move Networks’s technology will let him deliver better-quality online video, over relatively slow Internet connections, said Yong, who rates Dish and EchoStar “outperform” and doesn’t own either.
The Blockbuster acquisition has little to do with its retail stores and more likely is aimed at using the brand name for online video, including movie services similar to Netflix’s, said Mitchell.
“There’s no reason to be in the retail business for media distribution,” said Mitchell. “What Dish is looking to do is get rid of the retail business as fast as possible, and believe me, Charlie Ergen is going to be ruthless.”
Blockbuster and Slingbox
Dish may keep at least some of Blockbuster’s more than 1,700 stores and convert them into locations where customers can buy subscriptions to Dish, according to a company statement. Dish declined to comment on whether it plans to liquidate some of the stores, as certain contracts and leases have not been examined yet, Lumpkin said.
Dish could use Blockbuster’s assets to build a stand-alone website to compete with Netflix or to market Dish services to Blockbuster’s customers, which include about 1 million DVD mail subscribers, according to a note by Jeff Wlodarczak, an analyst at New York-based Pivotal Research Group.
“We would be surprised if Ergen has an absolute firm plan for the asset yet,” Wlodarczak said in his note.
Dish could also build Blockbuster’s streaming movie capabilities into its satellite-video offering and use Dish’s Slingbox technology to let users to watch on mobile devices, say analysts including Craig Moffett of Sanford C. Bernstein & Co.
Acquiring bankrupt companies with no public explanation of the strategy would “usually be met with a selloff in the stock,” which hasn’t happened, said Moffett in an interview.
Though investors may not see the benefits of the deals, they may trust Ergen knows what he’s doing, he said.
“There’s this cult of personality around Charlie Ergen that believes, maybe with some justification, that Charlie is the smartest guy in the room, and that maybe he’ll figure it out,” said Moffett.
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