The odds of a merger between DirecTV and Dish Network may end up taking a massive hit if President Biden’s broadband bill carries through as planned.
MoffettNathanson analyst Craig Moffett said the current administration’s plan to pump $100 billion into eliminating the rural broadband service gap could make a DirecTV-Dish deal easier to approve from a regulatory perspective. However, extending broadband to all rural U.S. communities and thusly providing consumers there with more choice for pay TV could have a potentially devastating impact on both DirecTV and Dish Network’s subscriber bases.
“Focusing on stickier rural customers has been the foundational element of Dish Network’s satellite TV strategy in recent years…and it has worked. The same strategy has kept DirecTV’s already-horrific subscriber losses from being even worse,” wrote Moffett in a research note. “Given the option, for the first time, of choosing not just cable but also OTT alternatives, it’s a safe bet that many customers will simply leave.”
Both DirecTV and Dish Network are carrying a lot of debt and Moffett argued that, even after factoring in substantial synergies that would provide a boost to margins and therefore EBITDA, combining the companies would only create an enterprise value of $1 billion. That raises issues with funding a merger.
“It is also not clear who would be the sponsor. Dish Network would obviously be a candidate, but we suspect investors would recoil from the idea of doubling down on the satellite TV business at almost any price,” wrote Moffett. “Private equity buyers would perhaps be more likely, but without the ability to significantly lever the balance sheet, equity returns would be poor at anything other than a very low entry price.”
Despite what would likely be an uphill battle, Dish Network Chairman Charlie Ergen has repeatedly said it’s inevitable that DirecTV and Dish will merge. In November, he said putting the two beleaguered satellite providers together would achieve the scale to compete with programmers that operate their own OTT streaming services, provided a potential deal could clear any regulatory hurdles.
“So, don't take me as gospel on this, but [AT&T] would like to deconsolidate that business and they would like to do that before they would take any regulatory risk…How they do that or whether they do that, of course, remains to be seen,” said Ergen in November, according to a Motley Fool earnings transcript. “But make no mistake, whether it's a year from now or 10 years from now, I believe it's inevitable that those companies go together.”
Indeed, AT&T did make a move to get DirecTV off its balance sheet when in February it confirmed a long-rumored deal with TPG Capital to sell a minority stake in its linear video businesses. DirecTV, U-verse and AT&T TV will now operate as New DirecTV, in which AT&T will own 70% of the common equity, with the other 30% going to TPG.