Potential Merger of DirecTV and Dish Would be ‘Doable Deal,’ Ergen Says

Dish and DirecTV aren’t in “active” merger discussions, but merging is something that both companies having been looking at for many years, Ergen said. Both companies have long hinted at a potential merger, but prospects for a deal have been hurt by antitrust concerns. But with broadband services delivering video, some of the barriers to a deal have been removed, analysts said. The Sirius-XM merger is “on point” when it comes to a similar deal being struck between DirecTV and Dish, given that those companies also faced increased Internet competition for audio, Ergen said.

"We believe the odds have increased that Dish is headed toward a merger with DirecTV, using spectrum as their most important government bargaining chip,” Bernstein Research analyst Craig Moffett said in a research note. “A merger with DirecTV would generate staggeringly large economic benefits."

The odds of a merger also improved as Dish reported lackluster Q3 results in its core video business, analysts said. Dish swung to a $158 million Q3 net loss from a $319 million profit a year earlier, incurring a $730 million legal expense tied its settlement of suit involving Cablevision and AMC Networks. Revenue slipped to $3.52 billion from $3.6 billion as Dish lost a net 19,000 subscribers to end Q3 with 14 million. Analysts had forecast Dish losing a net 37,000 subscribers. Gross subscriber additions increased to 739,000 from 656,000 a year earlier.

Dish’s monthly churn improved to 1.8 percent from 1.83 percent a year ago, but was short of analyst forecasts for 1.74 percent. Dish subscriber revenue inched up to $3.29 billion from $3.22 billion, but sales from its Blockbuster chain sank to $230.8 million from $347 million a year earlier. Dish has closed 700 Blockbuster stores this year, ending Q3 with 850. Dish’s subscriber business swung to a $241.6 million Q3 operating loss from a $620.9 million profit a year earlier, while Blockbuster had a $11.9 million operating loss against a $3.6 million profit a year ago. Dish’s wireless spectrum Q3 operating income, which includes the acquisitions of TerreStar and DBSD, posted a $19.4 million Q3 operating loss against a $240,000 profit a year ago despite an increase in revenue to $304,000 from $240,000. Dish’s U.S. sales declined $3.4 billion from $3.45 billion, while those in Mexico dropped to $37.5 million from $42.9 million. Dish has a joint venture in Mexico with MDC Communications.

Dish’s equipment and merchandise sales, which includes hardware sold through Blockbuster, declined to $252.9 million from $362 million. Dish’s per subscriber acquisition costs rose to $805 from $789 a year ago, with increased advertising spending tied to its Hopper DVR/satellite receiver. Average revenue per user grew to $77.57 from $76.99 on sales of higher priced hardware, Dish said. Dish’s total Q3 operating expenses rose to $3.7 billion from $2.9 billion a year earlier due largely to legal costs.

Dish paid $700 million to Cablevision and AMC Network to settle a long-running breach of contract suit over Dish’s dropping the Voom channel in 2008. In addition to a legal accrual ($676 million), Dish also accrued $54 million for programming, presumably stemming from its new carriage pacts with AMC Network and its AMC, WE, IFC and Sundance channels and Cablevision’s Fuse.

"Dish’s weak results in its core business are in fact a selling point to regulators for a merger with a much stronger DirecTV,” Moffett said. “While Dish’s results hardly qualify it for the ‘failing firm’ provisions, it surely cannot be lost on regulators that Dish and DirecTV are collectively barely growing and without a broadband offering of their own their ability to offer a competitive counter-balance to cable is becoming more limited."

The possibility that a combined DirecTV-Dish could offer a fixed wireless broadband network using the latter’s spectrum to compete with DSL and cable could be a “seductive one” to regulators, Moffett said. Dish built up wireless spectrum in the 2 GHz band with the acquisitions of TerreStar and DBSD and is awaiting an FCC decision that’s expected by year-end on whether it can use it. Dish also purchased for $80 million as part of its settlement with Cablevision the cable operator’s multichannel video distribution and data service spectrum licenses in the 12.2-12.7 GHz band that could be used for microwave backhaul to build out a network. Outside of a merger with DirecTV, Dish would likely seek a partner in deploying its wireless spectrum, Ergen said. But the field of potential partners narrowed this fall with the proposed merger of T-Mobile and MetroPCS, and Softbank’s proposed purchase of 70 percent of Sprint, Ergen said. The FCC process taken longer than expected for a ruling on spectrum use by Dish, which last fall expected a decision by the first half of 2012.

We “clearly aren’t going to do this alone and we have had discussions with all the major players,” in wireless, Ergen said. Dish sees “a lot of opportunity in the wireless market and we have a large cash balance that we're going to invest,” said Ergen, adding Dish would be “prudent” in its spending. Dish had $3 billion in cash and cash equivalents Sept. 30, the company said in an SEC filing.

A wireless network could also be used to bolster’s Dish’s new dishNET satellite broadband service that launched in October, analysts said. Dish executives didn’t give details of the performance on the new service during the conference call. As part of dishNET, Dish is providing wireline voice and broadband services across a 14-state western U.S. region as a competitive local exchange carrier. The wireline broadband delivers up to 20 Mbps download speeds.

Dish signed a construction contract in September with Space Systems/Loral for EchoStar-18, which will be launched in mid-2015 as a replacement for EchoStar-10 at 110 degrees west. Dish’s EchoStar-12 satellite suffered solar array “anomalies” in September and November that could reduce power available to operate the satellite, Dish said. EchoStar-12 at 61.5 degrees west, is operating in a spot beam mode, Dish said. Dish renewed Dishonline service and hardware re-manufacturing agreements with EchoStar, extending them to December 2013, Dish said. EchoStar revamps returned receivers for Dish, upgrading them to MPEG-4 video compression from MPEG-2.

Dish agreed to sub-lease to EchoStar five of its 24 transponders on the 32-transponder SES Latin America’s QuetzSat-1 satellite at 67.1 degrees west. The satellite went into service in Q4 2011 as EchoStar and Dish considered options for the satellite, Dish said. In the interim, Dish has been using an EchoStar-8 and EchoStar-1 satellites at 77 degrees west for the Dish Mexico satellite service it operates with MDC Communications. Dish Mexico had been scheduled to shift to QuetzSat-1 last year, but EchoStar delayed the change as it made an $80 million bid for a 45 degrees west orbital slot that could be used to expand video and data services in South America, EchoStar officials have said. Brazil’s communications regulator Anatel cleared the bid earlier this year.

The New York State Supreme Court in October awarded ESPN $5 million in legal fees stemming from a breach of contract suit Dish filed against the sports network four years ago, Dish said. Dish alleged ESPN didn’t provide it with HD feeds of Disney Channel, ESPN News, Toon and ABC Family. A N.Y. state jury found in favor of ESPN in October 2011. The New York State Supreme Court’s appellate division denied Dish’s request to appeal the decision, Dish said. At the same time, the appellate division upheld a court ruling that Dish owed ESPN $66 million under an affiliation agreement. Dish has accrued $71 million for the court award to ESPN and the legal costs, Dish said. But Dish will continue to “vigorously prosecute and defend this case,” it said.