A DISH Network Corp. (DISH)/DIRECTV (DTV) Merger Would Be Golden

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After a potential acquisition target of DIRECTV (NASDAQ:DTV) was taken off the market, chatter of a DirecTV-DISH Network Corp. (NASDAQ:DISH) merger has escalated. The big obstacle would be anti-trust hurdles, and given recent trends in US anti-trust regulation, that could be difficult to defeat. However, let’s take a look at what could happen if regulators allow it.


Increased Leverage Over Content Creators

One of the consistent themes we at Valuentum have been hitting on over the past year in the media space has been the rising cost of content. Netflix, Coinstar, Amazon, Hulu, cable, and satellite are all fighting for eyeballs, so the competition for content, particularly exclusive content, has heated up. Things have gotten so fierce that both Amazon and Microsoft are creating their own content to distribute via Prime and Xbox Live, respectively.

A merger between DISH Network Corp. (NASDAQ:DISH) and DIRECTV (NASDAQ:DTV) reduces the amount of players bidding for content, and it also would create a combined entity with 34 million TV subscribers in the US. With such a large subscriber base, satellite could better compete with the likes of Comcast and Time Warner Cable. We aren’t sure if it would materially lower overall content costs, but it helps to have another bidder out of the auction. Dish Chairman Charlie Ergen recently said that he thinks sports programming costs are quickly hitting the law of diminishing returns, so a merger between the two would give the company more leverage over Disney’s ESPN—one of TV’s costliest stations. We are confident ESPN’s advertisers would not want to potentially lose 30 million eyeballs.

Operating Leverage

In addition to leverage over content creators, we think a merger between the two satellite TV companies offers obvious cost savings. Both firms have a similar business model, and we think hundreds of millions of dollars in cost savings could materialize, generating robust free cash flow. DISH Network Corp. (NASDAQ:DISH) is known as the “meanest company in America,” known for its fantastic, if not overbearing, cost controls. Ergen, the man culpable for this attitude, remains the majority shareholder of Dish and would likely demand a meaningful position in a merged company.

DISH Network Corp. (NASDAQ:DISH) and DIRECTV (NASDAQ:DTV) already have low churn, and a merger between the two could also help the company raise prices. The satellite TV business is no longer a growth industry, and if anything, it could be heading for a secular decline. The days of over-aggressive price cutting to gain market share could be behind us. Therefore, we believe a combined company could achieve both higher ARPU and stronger operating margins as price increases and fixed costs decline.

Financial Flexibility

When it comes to financial flexibility, size does matter. While Apple may not have any desire to utilize its cash hoard, we have reason to believe a combined Dish/DIRECTV (NASDAQ:DTV) would put its substantial free cash flow to work. Dish has aggressively purchased spectrum over the past few years in order to create a streaming service, or maybe even a cellphone provider. The company has been linked to several smaller mobile providers like MetroPCS and even made a bid for Clearwire. With SoftBank acquiring 70% of Sprint, we think that company is off the table, but could Dish/DirecTV acquire T-Mobile, the US’ fourth largest cell phone carrier? We believe so.

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