Dish and DirecTV deal: Damned if they merge, damned if they don't
Comcast Time Warner Cable deal has investors salivating
Analysis Almost like a delayed reaction, the news that Dish Network had been actively courting DirecTV once again in the US has driven up both companies’ share prices, triggered by the Comcast Time Warner Cable deal.
The share price movements should have happened the day the Comcast TWC deal was mooted, but were only came about after concrete news of Dish’s chairman courting DirecTV.
So we had a frantic email exchange with our old finance analyst friend Gerard Hallaren at Janco Partners about the possibility of a deal. It has been mooted for many years, and goes right the way back to Dish being thwarted in its attempt to buy DirecTV at the time when control of it went to the then News Corp.
Since then it has been wrestled from News Corp’s Rupert Murdoch by John Malone, and added to his Liberty Media empire, with some clever financial shenanigans which amounted to a threat to buy enough shares in News Corp to destabilise the Murdoch family control.
Dish’s Chairman Charlie Ergen resented that 2002 intervention by the Justice Department and the subsequent strength that brought to DirecTV. It flourished under Murdoch who has DTH empires around the world from Australia and China through Europe, and he very much understands how to get the best out of that business. Malone has continued where he left off, with prodigious gains in Latin America.
So now Dish would be the junior partner in any such deal, rather than the outright owner it would have been in 2002.
Dish brings to that equation the spectrum hoard that it has built up which may one day, perhaps with Sprint as a partner, provide the return path to turn the business into a quad or triple play – selling wireless broadband and voice.
Looking ahead we can see the Justice Department okaying a deal between Dish and Sprint, no problem, but we’re not so sure of it okaying a deal between a freshly merged Dish and DirecTV with Sprint.
Then Hallaren made the observation that perhaps this deal was designed to throw a harsh light on the Comcast TWC deal and show the Justice Department the kind of world it is creating if it allows a Comcast TWC merger. How can it allow a merger that leads to 35 million cable homes, a deal that impacts multiple markets – TV, voice and broadband – and then not allow a similar 35 million home merger in pure DTH? It couldn’t.
And given the precedent of the Dish DirecTV merger not being allowed 12 years ago, the Justice Department would not want that deal to re-emerge.
So if the Justice Department plans to say no to the DTH merger of equals, it may feel it cannot start things off by allowing the cable deal. And if that deal falls apart, strangely that puts Time Warner Cable back in the frame for a merger with Charter, who of course is being led now by shareholder John Malone. Which brings us full circle to where we came in.
It is in both Ergen's and Malone’s interests to kill this deal. It is in both their interests to merge now, but only if the deal cannot be killed, so it is best to agree terms and have a higher share price for a while, in order to find out which way the Justice Department leans. Hallaren points out that, historically, in a second-term presidency antitrust cases are avoided, which might point to both deals being allowed. All of which would create carnage in content purchasing, broadband concentration and media reach.
Copyright © 2014, Faultline
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