March 26 (Bloomberg) -- Dish Network Corp. Chairman Charlie Ergen recently contacted DirecTV Chief Executive Officer Mike White to discuss a merger of the two satellite television companies, according to several people with knowledge of the matter. Shares of both companies rose.
Ergen made the approach in response to Comcast Corp.’s $45 billion acquisition of Time Warner Cable Inc. announced in mid-February, one of the people said, asking not to be identified discussing confidential information. White is reluctant to push forward with formal talks out of concern regulators may block the deal because the two companies directly compete with each other, another person said.
DirecTV is the largest U.S. satellite-television operator, with about 20 million paying subscribers. Dish is No. 2 with about 14 million subscribers, and also has a spectrum portfolio that may be valued at almost $26 billion, according to Bloomberg Industries. Dish has said it remains open to all options to monetize the U.S. airwaves, including building its own network or teaming up with an existing carrier, such as Verizon Communications Inc. or AT&T Inc.
“Given the rapidly changing industry dynamics, everyone should be talking to everyone, and if you’re not you might be left behind,” said Walt Piecyk, an analyst with BTIG LLC. “I highly doubt that DirecTV is the only company that Ergen has spoken with. This should serve as a reminder to AT&T and Verizon that a strategic asset has other options that could make Dish un-buyable in the future.”
A deal may be more likely to pass after the current administration departs, one person said. The key to a deal being approved is how regulators view the market, another person said. If video competition is extended to online services, such as Netflix Inc., a deal could pass, the person said.
Even if regulators allow Comcast’s acquisition of Time Warner Cable, DirecTV management doesn’t see the cable deal as a proxy for an approval of deal with Dish, said another person. DirecTV and Dish’s 2002 attempt to merge was blocked by regulators.
“We aren’t suprised that the two CEOs would discuss a deal,” James Ratcliffe, an analyst at Buckingham Research Group, wrote in a note after the report. “Ergen has made it clear in the past that he believes a combination with DTV would create significant value (and we agree), so the fact that he approached DTV CEO Mike White wouldn’t surprise us.” Still, Ratcliffe wrote, “we remain skeptical” because of prospects for a “difficult regulatory approval process.”
Shares of DirecTV rose 5.7 percent to $77.34 at the close in New York, giving the company a market value of almost $40 billion at the close in New York. Dish gained 6.3 percent to $62.09, giving it a market value of $28 billion.
“There is obviously a business case that makes a lot of sense for consolidation in the satellite industry,” Ergen said in November, before the Comcast-Time Warner Cable deal was announced. “You’re going to see consolidation, maybe first in the cable industry,” he said.
“You’re seeing in the government’s part that they do negotiate things within the airline side, so it makes a lot of sense,” Ergen said, referring to the U.S. government’s willingness to negotiate on antitrust issues in the airline industry. While federal regulators initially sued to block American Airlines parent AMR Corp.’s $17.2 billion merger with US Airways Group Inc., in November the companies reached a settlement with the Justice Department that put the merger back on track. “Whether that ever comes to fruition is another story, but I mean I think both Dish and DirectTV realize that that can make a lot of sense.”
Although White is hesitant to pursue a deal, he hasn’t ruled it out entirely, one person said. The talks are being conducted at a senior level with no official process yet under way, several people said. White has been openly more wary about a possible combination.
“While I certainly believe our industry has changed substantially and I believe there are a lot of reasons why consolidation in our industry would be pro-consumer to try and improve the balance between programmers and distributors, you still have to go sell that in Washington,” White said in December.
Darris Gringeri, a spokesman for DirecTV, declined to comment, as did Bob Toevs, a spokesman for Dish.
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