Dish or DirecTV Need Deal Most in AT&T Love Triangle: Real M&A

In the three-way courtship developing between phone giant AT&T Inc., DirecTV and Dish Network Corp., the two satellite-TV providers have the biggest need for a deal.

The planned merger of cable rivals Comcast Corp. and Time Warner Cable Inc. to create an even bigger provider of both TV and Internet in the U.S. is accelerating the need for consolidation in the rest of the industry. Meanwhile, the pool of pay-TV customers is peaking as viewers increasingly watch video online, making fast broadband connections a key offering.

When Bloomberg News reported in March that Dish Chairman Charlie Ergen had approached DirecTV about a merger, some analysts said that AT&T would be a better suitor for his satellite-TV business and wireless spectrum. Reports this week that AT&T is instead considering a bid for DirecTV are now raising questions about which combination makes the most sense and stands the best chance of getting past regulators. Whatever the answer, it’s becoming clear that DirecTV and Dish may need a deal more than AT&T, because of their dependence on their satellite-TV operations.

Dish or DirecTV “would probably like to be merged with or acquired by just about anybody,” Michael McCormack, a New York-based analyst at Jefferies Group LLC, said in a phone interview. “If you truly believe that a single-product portfolio of satellite-delivered television is not the future of TV watching, it’s clear that they would be at a significant disadvantage.”

Deal Options

If the ultimate outcome is a DirecTV-AT&T alliance, AT&T would be able to bolster its TV business, and DirecTV wouldn’t be on its own without a competitive Internet package, according to Tuna Amobi, a New York-based equity analyst at S&P Capital IQ.

At the same time, Dish, in addition to satellite-TV, has built up a portfolio of wireless airwave licenses worth almost $26 billion that could help AT&T expand its capacity.

“There’s always a lot of gamesmanship with M&A,” said Amy Yong, a New York-based analyst for Macquarie Group Ltd., who sees logic to AT&T buying either one of them. “DirecTV has a better growth profile, but Dish has valuable spectrum.”

Comcast’s proposed acquisition of Time Warner Cable was the starting gun of sorts for a new M&A race. Not only is Comcast a double threat by owning NBC programming content and distribution, with the most broadband and TV customers, it also expands its geographic reach by combining with Time Warner Cable.

Chess Pieces

After selling some cable subscribers to appease regulators, the deal will leave Comcast-Time Warner Cable with less than 30 percent of the pay-TV market.

AT&T Chief Executive Officer Randall Stephenson called the Time Warner Cable takeover an “industry-redefining deal.” Big cable became an even more troubling threat in the first quarter as market share gains shifted away from the phone companies. After years of luring cable customers to bundles of TV, Internet and phone services, AT&T and Verizon Communications Inc. saw a sudden reversal when cable companies took back customers for the first time.

“It’s like a chess game, and everybody’s watching Time Warner Cable and Comcast,” said Amobi at S&P Capital IQ. “There’s nothing I would rule out.”

AT&T, the second-biggest U.S. mobile-phone carrier, approached DirecTV about possibly acquiring the satellite-TV company, the Wall Street Journal said this week, citing people familiar with the situation. It’s unclear whether the companies are in detailed talks, although DirecTV would be open to a deal, the report said.

U.S. Opportunities

AT&T, which had been exploring wireless opportunities in Europe, including the possibility of acquiring Vodafone Group Plc, has turned its attention back to the U.S. market. If it’s interested in satellite-TV assets, negotiating a deal with DirecTV rather than Dish may prove a bit easier, according to Yong of Macquarie.

Bob Toevs, a Dish spokesman, Cara Brugnoli, a DirecTV spokeswoman and Mark Siegel, an AT&T spokesman, all declined to comment on M&A possibilities.

With DirecTV, “you’re dealing with a clean corporate governance, where you just have to address the board and make sure shareholders vote for the deal,” Macquarie’s Yong said. With Dish, suitors have to negotiate with Ergen, the chairman who owns a majority stake in the company.

Yong estimates AT&T, with a market value of $185 billion, will need to offer at least a 20 percent premium for DirecTV, implying an equity value of almost $50 billion. Dish is a smaller bite, currently valued at $28 billion.

Regulatory Hurdles

The question in any tie-up is whether regulators will go for it. A merger of DirecTV and Dish was blocked more than a decade ago. Any of the three potential combinations may draw regulatory scrutiny because AT&T, DirecTV and Dish compete for video subscribers in some parts of the country, meaning that consolidation would remove an option for customers in those areas.

Comcast and Time Warner Cable, on the other hand, don’t compete head-to-head because they operate in different cities, potentially making their merger more palatable to regulators. The deal hasn’t been approved yet.

McCormack at Jefferies is skeptical that AT&T is interested in either Dish or DirecTV: Why double down on a shrinking video market? Instead, he said a tie-up of Dish and DirecTV is more plausible because the combined company would be a stronger competitor to Comcast-Time Warner Cable and have greater leverage in negotiations for programming for both satellite-TV and Internet-delivered TV.

‘Staggering’ Synergies

The synergies of a Dish-DirecTV merger would be “staggering,” according to Craig Moffett, founder of research firm MoffettNathanson LLC in New York. Cost savings and cheaper programming fees from combining DirecTV’s 20 million video customers with Dish’s 14 million could lead to synergies of about $30 billion -- more than Dish’s entire market value.

DirecTV CEO Mike White has decided not to transform the direction of his company in recent years, as opposed to Dish’s Ergen, who has spent billions of dollars acquiring wireless spectrum and attempted to buy Sprint Corp. last year.

White has looked at buying Netflix Inc., Hulu LLC and Vivendi SA’s GVT, a Brazilian telecommunications company, and hasn’t pulled the trigger on any of them, favoring buying back shares. The decisions have put DirecTV in a position to sell rather than build out new businesses.

Verizon Option

If Dish gets left out of this merger, being bought by Verizon is a possibility, S&P’s Amobi said. In February, Verizon completed its $130 billion acquisition of Vodafone’s 45 percent stake in Verizon Wireless, and it had $2.9 billion of cash as of March.

“Verizon has ample dry powder and the capacity to go ahead and make a bid, especially given the interest-rate environment,” he said. “It has resolved the Vodafone situation, so the thinking for the time now is really, what’s next?”

Bob Varettoni, a Verizon spokesman, declined to comment.

It’s unclear whether Verizon has any interest in satellite TV, which is past its prime, said David Heger, a St. Louis-based analyst at Edward Jones & Co. The number of Americans who pay for TV through cable, satellite or fiber services fell by more than a quarter of a million in 2013, the first full-year decline, according to research firm SNL Kagan.

Satellite Decline

It’s not that viewers are watching less video. Online-streaming services from Netflix and Inc. continue to draw more users, charging fees of less than $10 a month, while fewer people are willing to pay $40 a month or more for the wider menu of cable channels.

“The pay-TV industry has kind of stagnated,” Heger said. “The number of households subscribing isn’t growing anymore, and it’s on the verge of starting to decline.”

Dish at least has valuable spectrum that, at some point, wireless carriers will want access to, he said.

That may explain why Dish’s stock rose more than 6 percent this week after the report that AT&T is looking to buy its rival. Those gains may be unwarranted though, according to Moffett at MoffettNathanson LLC in New York.

“There are only three outcomes that are attractive if you’re a Dish shareholder: You either merge with DirecTV, you sell to AT&T, or you sell to Verizon,” Moffett said in a phone interview. “If the news is to be believed, then two of those three are off the list. And if the logic of an AT&T-DirecTV merger is thin, the argument for a Verizon-Dish merger is even thinner.”

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