Is Now the Time for a Major Satellite Merger?

A possible merger between DIRECTV (Nasdaq: DTV  ) and Dish Network (Nasdaq: DISH  ) has been on the table for a decade. Dish CEO Charlie Ergen tried to get the job done 10 years ago, only to have it rejected by the feds. Now the idea is back on the table for both groups, and Ergen says this time it could actually pass the federal regulatory test. Though I am typically not a fan of mergers, as they all too often have a way of erasing shareholder value, this could be a great move for both companies, consolidating the satellite industry and launching a new competitive service against its cable and telecom brethren.

Big fan, little fan
I have been following DIRECTV since its spin-off from Liberty Media (Nasdaq: LMCA  ) . The company's strategy of increasing its average revenue per unit in the mature, saturated U.S. market while gaining hoards of new subscribers in Latin America seemed like the best way to go about things in the current landscape. Dish, on the other hand, has been focusing on launching a new national wireless-broadband network, while net subscriber additions have been lackluster. Still, both companies have plenty of bulls. Warren Buffett's Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) holds a large position in DIRECTV and recently added to it, according to the conglomerate's latest filings. Leon Cooperman and George Soros have been adding Dish stock to their portfolios in the hundreds of thousands of shares. Clearly, there is value to be had in either stock.

So what would it look like if the only two major U.S. satellite players remaining joined hands and married (in a state that allowed such things)?

Why now?
Now may be as good a time as any for the two companies to come together. When the merger was first attempted a decade ago, the government thought it was not in the best interest of consumers and competition. But in today's landscape, which is dominated by the power of content producers and the ever-increasing trend of "unplugging" (switching away from both cable and satellite in favor of On Demand and streaming services), it may be the wisest and most competitive play for either company. As mentioned, Dish CEO Charlie Ergen has been mulling over the idea, though he is quick to note that no formal discussions between the two companies have occurred.

A deal between DIRECTV and Dish would accomplish a few things, aiding both companies. Dish has invested $4 billion in its proposed wireless-broadband network. This has come in the face of regulatory challenges and business-to-business battling, leaving some analysts (including this one) to think that it's been more trouble than it's worth. In the meantime, DIRECTV has expressed little interest in chasing down a wireless network and is instead focusing on core operations. The strategy has been working, as the company continues to add hundreds of thousands of new subscribers in Latin America, though mounting costs are keeping profit somewhat limited in the region. DIRECTV bears also mention that the company is missing out on future opportunities by ignoring Dish's network plan.

A merger between the two companies would go a long way to nail down the U.S. and Latin American satellite-subscriber markets. The companies could leverage their synergies to lower costs and provide better pricing opportunities to new customers -- likely ones who are currently cable users. DIRECTV has roughly 20 million subscribers, while Dish has 14 million. Combined, Dish would have a large built-in market to sell its new wireless network. DIRECTV would have solved the problem of having no exposure to the broadband market at all.

It seems Ergen is currently more interested in the idea than DIRECTV CEO Michael White. White apparently has more doubts about the likelihood of government approval, and he also has some hesitations about jumping in on the ultra-expensive, ultra-competitive spectrum game. Dish has been investing in the debt of a yet-unknown company, though many speculate it could be beleaguered telecom company Clearwire (Nasdaq: CLWR  ) . If Dish is able to acquire enough of the debt of Clearwire or another troubled spectrum-owner, it would likely take over those valuable assets in the event of a bankruptcy. In the meantime, however, it is an expensive process that leaves Dish in a large amount of debt.

All in all
The deal seems logical enough. Secure the satellite pay-TV markets -- which isn't a huge jump, given that there are really only two companies doing it on a large scale anyway -- while adding another broadband offering to the market.

The question of whether the government would approve such a deal still looms, but given the increasing discussion taking place around the issue, it looks like we will have an answer from somebody sooner than later.

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