Dish Sets Stage DirecTV Merger with

Dish's Charlie Ergen says he sees no reason why satcasters couldn't merge if Comcast deal for TW Cable is approved

Dish Network said it is transferring five satellites to EchoStar — a move that paves the way for a merger with DirecTV, according to Citigroup analyst Jason Bazinet.

The prospect of a DirecTV-Dish merger has kicked around for years, but Comcast’s plans to acquire Time Warner Cable in a $45.2 billion megadeal could be the catalyst that pushes the satellite players together. However, other analysts don’t believe such a hookup is imminent and would be complicated by regulatory issues.

On Friday, Dish announced in reporting fourth-quarter 2013 results that it had reached a new agreement with EchoStar (which separated from Dish in 2008) under which Dish will transfer five satellites to EchoStar on March 1, 2014, and pay EchoStar $11 million in cash. Dish will lease back certain satellite capacity on those five satellites and will receive preferred tracking stock that represents 80% of the value of EchoStar’s residential retail satellite broadband subsidiary, Hughes Network Systems.

With that transaction, Dish has set itself up for a merger with DirecTV, Bazinet said in a research note.

“Dish has now harnessed all the broadband assets (spectrum + satellites) paving the way for the DirecTV merger (versus sale to telcos),” he wrote. “With 56 MHz of spectrum plus the consumer satellite broadband business, Dish may have a pro-forma arsenal that could be used to help get a DirecTV-Dish merger through the regulatory gauntlet.” According to Bazinet, Dish is now primed to offer new concessions to the FCC regarding rural deployment of broadband in underserved areas.

Dish chairman Charlie Ergen, asked on the satcaster’s earnings call about a possible merger with DirecTV, did not rule it out. The proposed Comcast-TW Cable merger, he said, “certainly doesn’t hurt the case for consolidation within the satellite industry.”

Ergen continued, “If you take the No. 1 and 4 providers and put them together” — meaning Comcast and TW Cable — “it would be hard to see why you couldn’t put the No. 2 and 3 providers together,” meaning DirecTV and Dish. That said, Ergen added, “I don’t think we have thought about it enough internally” to determine how realistic a merger between the two could be.

On DirecTV’s fourth quarter call Thursday, CEO Mike White didn’t address the question of a potential DirecTV-Dish merger. In September, he told Wall Street analysts that a merger of the satellite companies would provide billions in cost savings, U.S. regulators would be likely to reject such a proposed deal.

But White expressed concern about the Comcast-TW Cable deal, because it would consolidate significant broadband and media assets into one company. He urged regulators to “appropriately” scrutinize it. “If the deal is approved as proposed, it clearly represents an unprecedented media concentration in one company,” White said. “I think it certainly creates some significant changes in the competitive landscape that we need to think hard about.”

Ergen called the Comcast-TW Cable proposed merger “unprecedented” and said there was “nothing that I can see that’s positive about it for anyone in the video or broadband or content business” — except for those two companies.

The ultimate endgame for DirecTV and Dish is to merge, MoffettNathanson analyst Craig Moffett wrote in a research note, “but that merger still looks far off and uncertain.”

In Q4, Dish added 8,000 TV subscribers versus a net addition of 78,000 in Q4 2012. The No. 2 satcaster in the U.S. ended 2013 with 14.057 million pay-TV subscribers — a net increase of just 1,000 over 2012. The company’s nascent satellite broadband service more than doubled in 2013, as Dish added 253,000 net broadband subscribers to bring total broadband customers to 436,000. “At best, Dish is treading water,” Moffett wrote.

Dish posted 2013 total revenue of $13.9 billion, up 5.5%, and net income of $807 million, an increase of 26.8% from 2012. Dish at the end of last year shut down remaining Blockbuster company-owned retail stores and DVD-by-mail service; it now accounts for Blockbuster as discontinued operations for all periods.

Also on the call, Ergen said with respect to carriage talks with Walt Disney Co., nothing has changed since the Q3 conference call. He said Dish is still “cautiously optimistic” it can reach a deal with Disney for ESPN, ABC stations and other nets, saying it’s a complex, long-term deal “where we’re trying to look out into the future.”

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