A Buyout of Dish Network May Never Happen

In spite of the incentive for other telecommunications companies to grab hold of Dish Network following AT&T's bid for DirecTV, a deal involving the provider looks unrealistic.

May 29, 2014 at 5:25PM


Source: Wikimedia Commons

After news broke on May 18 that AT&T (NYSE:T) agreed to buy DirecTV (NASDAQ:DTV) in a transaction valuing the company at $48.5 billion, investors and analysts began questioning what the future holds for Dish Network (NASDAQ:DISH). To some, the acquisition could signal a starting point for Dish Network to be bought up by a competitor of AT&T. To others, it appears that the deal could be a sign that the business is no longer a viable mergers & acquisition candidate.

Moving forward, does the issue of a buyout/no buyout scenario really mean anything to the company? Does Dish Network need to worry about selling itself off, or does the business have what it takes to do well on its own?

A buyout could mean big things for Dish Network!
According to the terms of its agreement, AT&T is expected to acquire DirecTV in a deal that places a per-share value on the company of $95. Using a Price/Revenue, a Price/Earnings, and a Price/Free Cash Flow model, the cost of AT&T buying up DirecTV can be seen in the table below:

  Current Price Buyout Offer
Price/Revenue 1.3 1.5
Price/Earnings 14.5 16.7
Price/Free Cash Flow 16.2 18.9

Source: Made by Author with Data from Yahoo! Finance

By using the data provided, investors can get a pretty fair idea of what another big player might be willing to pay for Dish Network.

  Same Terms as DirecTV Excluding Impairment
Price/Revenue $21.3 billion  
Price/Earnings $13.5 billion $18.4 billion
Price/Free Cash Flow $18.9 billion  

Source: Made by Author with Data from Yahoo! Finance

Looking at the table above, it wouldn't be unreasonable for one of AT&T's competitors to buy up the business for somewhere in the range of $13.5 billion and $21.3 billion. After factoring in extraordinary charges totaling $437.6 million from 2013, the range narrows to between $18.4 billion and $21.3 billion, which should serve as a good back-of-the-envelope guide for investors.

There is, however, one problem with this valuation method: Dish Network's current market value stands at about $27.5 billion. This is roughly 29% above the highest price point somebody might be willing to pay for the business if its operations and market presence are considered to be on par with DirecTV's. In order to justify paying the company's current price, let alone a premium to it, Dish Network must provide a potential acquirer either stronger fundamentals or more attractive growth prospects.

Dish Network doesn't look to be anything special
Over the past five years, DirecTV has given investors a heck of a run. Between 2009 and 2013, the company saw revenue soar 47% from $21.6 billion to $31.8 billion while net income rose 204% from $942 million to $2.9 billion. Although not as impressive, the business also enjoyed rising free cash flow, which inched up by 10.5% from $2.4 billion to $2.6 billion.

DTV Revenue (Annual) Chart

DTV Revenue (Annual) data by YCharts

While DirecTV has done exceedingly well, Dish Network has lagged behind. During the same five-year period, the company saw revenue increase just 19% from $11.7 billion to $13.9 billion while net income jumped 27% from $635.5 million to $807.5 million. From a free cash flow perspective, management reported a 12% drop from $1.2 billion to $1.1 billion.

Foolish takeaway
For investors hoping to get into a quick buyout opportunity, Dish Network seems to be, at face value, a very logical choice. In addition to being a big company, the fact that its larger rival has been sought out for purchase suggests that somebody competing with AT&T might feel pushed to respond by picking it up. Although this isn't out of the question, it appears to be unlikely for now.

On top of growing far slower than DirecTV, investors trying to buy up Dish Network would end up paying a significantly higher premium for it than AT&T did for its rival. For this reason, combined with the fact that short-term speculation is never a good way to participate in the market, the Foolish investor shouldn't get their hopes up about making a quick buck from buying Dish Network. The smarter course of action would be to evaluate the long-term prospects of the business and formulate an investment thesis on the business that assumes no buyout will take place.

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Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends DirecTV. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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