- As expected, the merger of Dish DBS and DirecTV fell through
- Dish bondholders rejected terms that would have seen their investment reduced by $1.5 billion
- EchoStar has vowed to soldier on with its 5G network build and Boost Mobile service
Even before DirecTV terminated its merger with Dish DBS at 11:59 p.m. ET on Friday, EchoStar was contemplating a future where that transaction was not part of its immediate future.
The merger was contingent on Dish bondholders accepting a debt exchange offer that included a $1.5 billion reduction in their holdings. DirecTV warned that the merger would be terminated if bondholders didn’t agree to the exchange, and they didn’t.
The transaction would have created the nation’s largest pay TV distributor, consummating a merger that EchoStar Chairman Charlie Ergen considers “inevitable.” Analysts think a merger of the two eventually will happen, although the synergies are shrinking with each passing day.
During the company’s Q3 earnings call earlier this month, EchoStar CEO and President Hamid Akhavan reassured investors that EchoStar would continue to operate its business regardless of the outcome. “Whether the transaction closes or not, we do have a path forward,” he said.
EchoStar reiterated that theme after the official word from DirecTV that the deal was off.
“As mentioned on our recent earnings call, we have a more robust foundation to operate and grow EchoStar’s business, independent of this agreement,” said EchoStar spokesperson Ted Wietecha in a statement, noting that EchoStar repaid its November debt maturity with funds received in September and managed to get an additional $5.6 billion in financing through spectrum secured notes and equity issuances.
DirecTV said termination of the Dish acquisition doesn’t affect private equity firm TPG's acquisition of the remaining 70% stake in DirecTV from AT&T.
Nobody is surprised
Recon Analytics founder Roger Entner wasn’t surprised the deal fell through.
The problem, as predicted, was bondholders wouldn’t take the deal. “It was just too much of a haircut with too much of an upside for Charlie Ergen,” Entner said. “The sweetener was not sweet enough.”
Yet he believes the two satellite TV companies will take another stab at a merger in the future. Both are struggling in a dwindling industry and the synergies are too great to ignore.
“He’s gonna try again,” Entner said of Ergen, noting the cost savings of having to operate just one management team, one billing department and other reductions.
But the next iteration of the deal may have to wait until litigation between EchoStar and bondholders is resolved. “The key reason this deal failed is because both sides in the litigation are convinced that they will win,” New Street Research (NSR) analyst Jonathan Chaplin wrote in a note for investors. “Unfortunately, the litigation could take a while.”
If the deal had gone through, EchoStar’s management would have benefitted from not having to deal with the Dish DBS business as they pursue their ambitions in wireless, he said. EchoStar expects to reach 80% of the U.S. population with its 5G network by the end of this year.
“We think the simplest way to contextualize what EchoStar loses from the deal is the $1.5BN haircut to the DBS debt outstanding. This is worth about $4/share and lowers our price target to $91 share,” Chaplin said.
Boost needs a boost
This holiday shopping season, typically the busiest for wireless carriers, is especially crucial for EchoStar’s Boost Mobile wireless business, which has been losing customers since Dish Network acquired it as part of T-Mobile’s merger with Sprint.
Boost Mobile insists that it’s shaking up the wireless industry and ready to take on the Big 3 wireless carriers – and it appears to be pulling out all the stops with Black Friday deals that started on November 19.
Entner is skeptical about Boost Mobile’s future. “They bought themselves a lot of breathing room, but it still doesn’t look great,” he said. “I tip my hat to them for the engineering team, but from a sales and marketing perspective, this is an abysmal failure. The marketing has been the weak spot.”
The analysts at NSR think EchoStar will spend the next two to three years doing everything they can to build a successful business and if they fail, they’ll sell Dish’s treasure trove of spectrum, providing a “win” for investors regardless of what happens.
“EchoStar now has the resources they need to pursue their wireless ambitions with the closing of the $5.6BN in new funding. We will be focused on progress at Boost and progress at 5G Networks from here,” Chaplin concluded.