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Satellite-television giant DIRECTV (NASDAQ: DTV ) has employed Latin America as its growth driver over the past couple of years, and it's been a wonderful partnership. The company has gained millions of subscribers in the region while its North American business faces the same challenges felt by competitor DISH Network (NASDAQ: DISH ) and other service providers. Recently, DIRECTV courted Vivendi-owned GTV, a Brazilian broadband player with 10% of the market share. However, the deal recently crumbled over disagreement on price. This left some analysts thinking now may be an appropriate time for DIRECTV and DISH Network to join forces. What would that look like?
A history of not merging
The DIRECTV-DISH merger is not a new concept at all. The two companies actually tried to do it back in 2002, but regulators determined it was not in the best interest of free markets. This wouldn't be the same situation today, though, given the formidable competition from streaming services such as Netflix and Amazon.com, in addition to traditional cable companies.
But why would the two companies want to merge? DIRECTV CEO Mike White said the two companies do, in fact, have strong potential synergies.
Two different strategies, same goal
Both DISH and DIRECTV have taken significant, though very different, strides to navigate the changing tides of content distribution. DIRECTV has taken what I consider to be a more traditional, risk-averse strategy of expanding into emerging markets -- mainly Latin America. This has, as I mentioned, led to explosive subscriber growth quarter after quarter, even if ARPUs have suffered because of low price points and exchange rates. DIRECTV's shares are currently trading at an all-time high.
DISH, on the other hand, took the risky road, and it has yet to pay off. The company has been aggressively attempting to build out its own broadband network, with some degree of success. But what it really needs is a partner. The company recently made an offer for Clearwire that came in at a premium to Sprint Nextel's offer, but most believe Clearwire will ultimately go to the latter. This leaves DISH in a tricky position -- it has billions invested in valuable spectrum, years of regulatory shuffling and positioning, and meanwhile, lackluster subscriber numbers in its U.S. market. If DISH is eventually able to launch its wireless network and compete head-on with telecoms, it would be a major value driver going forward, but this leaves little to be excited about in the short term.
So by merging with DIRECTV, DISH would solve its core business stagnation. The resulting company would easily be the satellite-television overlord of the Americas, with plenty of cash flow from both its higher ARPU North American subscribers, and its rapidly increasing Latin American operations.
DIRECTV, on the other hand, would get the spectrum and broadband play, possibly even more valuable than its proposed acquisition of GTV.
Many, including Investment bank Macquarie, think this merger makes more sense now than ever and could be right around the corner.
Good, bad, indifferent?
Some of the benefits to the proposed company, and hopefully its stock, would be the typical increased operating efficiencies and scale. Marketing spend could be reduced and cutthroat pricing may be alleviated, though the company would still need to stay competitive with cable and streaming options.
But the real benefits of this merger are long-term implications. DISH Chairman Charlie Ergen mentioned that the power in this business currently lies with content providers over distributors. This leaves the satellite and cable companies in a difficult position -- a mature market with commodity like properties facing fierce competition from the infinite ability of the Internet. Even DIRECTV, a company I have been a long time fan of, doesn't have the exposure it needs to this disruptive force to remain competitive over the long term.
The immediate winners of the merger would be DISH shareholders, who would probably see a sharp premium to the current stock price. Macquarie analysts think DIRECTV would pay as much as $50 per share for DISH, compared with today's price of less than $35. DIRECTV shareholders may have to wait much longer for their own benefits.
While this proposed merger may be the best for the businesses involved, I would prefer to own cash-flow-winning DIRECTV today and for a few more years, without DISH.
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