Dish Network Corp (DISH) has reportedly approached its primary rival, DirecTV LLC (DTV), to discuss a potential merger that will create the second largest pay-TV provider in the US. The news was broken by Bloomberg at 1:30 PM yesterday, after which shares of both satellite-TV operators moved up in afternoon trading.
Dish Network stock jumped 6.3% to $62.10 at the close of trading yesterday, while DirecTV rose 5.7% to $77.3.
People familiar with the matter said Dish Network Chairman Charles Ergen had approached DirecTV CEO Mike White to initiate talks over a merger as a way to better compete in an increasingly challenging industry, where growth has recently become hard to come by. The talks still in their early stages though, and are being held at the senior level. Neither company has made an official statement.
The move does not come as a surprise, given Comcast Corporation’s (CMCSA) announcement last month that it would acquire rival Time Warner Cable Inc. (TWC) in a $45 billion deal that would create the largest cable operator in the US.
A merger between the industry’s two largest satellite-TV players has been anticipated for quite a few years. Dish has reportedly been looking to invest in more wireless spectra to fuel growth. The Englewood, Colorado-based company already has valuable licenses to operate on a range of satellite spectra in its asset portfolio, and industry experts believe that DirecTV perfectly complements the company’s services.
The deal between the two is now being seen as essential if they wish to compete against a larger Comcast, which will have almost 35 million subscribers if the deal with Time Warner goes through. DirecTV currently has around 20 million satellite subscribers, and generated revenues of around $31.7 billion in fiscal 2013. Dish is the smaller of the two, with around 14 million subscribers and $13.9 billion in revenues for the same period.
Although satellite players are not shedding subscribers at the high rates some of their cable rivals are, they lack ancillary services that can protect against an industry-wide decline in customers. Therefore, a larger, more insulated satellite-TV company is an attractive value proposition to many investors. Craig Moffett, co-founder of MoffettNathanson Research, has estimated that the merger will result in synergies of around $30 billion.
A potential deal between Dish and DirecTV will face strict scrutiny from regulators, who will be wary of price-fixing and anti-trust issues arising from the merger of two of the most influential companies in the satellite-TV space. The two companies had proposed a merger back in 2002, but the Federal Communications Commission (FCC) quickly moved to kill the deal, citing reduced competition in the industry that was likely to follow such a move.
The FCC is likely to argue that such a large merger in the pay-TV market will result in almost half of the market being controlled by just two players. Dish and DirecTV will contend that the merged company will be able to compete better against a larger Comcast.
But regulators are likely to counter by saying that cable operators like Comcast and Time Warner do not compete directly against each other in most domestic markets, while Dish and DirecTV do compete in almost every urban region, and even more so in rural areas, where satellite connections are the only option for consumers.
Yet some still believe that the effort to consolidate couldn’t come at a better time, as the ongoing scrutiny of Comcast’s deal with Time Warner Cable is likely to give impetus to the direction the Dish-DirecTV initiative will take. Some analysts believe that it will be easier for the companies to get a deal past regulators while they are tied-up weighing Comcast’s acquisition.
“It’s a great time to draft on the momentum that Comcast and [TWC] are going to achieve, and they will,” said Jimmy Schaeffler, an industry expert and consultant.
The cable and satellite television industry in the US is currently approaching its maturity phase, with subscriber base growth showing signs of a sharp slowdown and some of the largest players ramping up efforts to consolidate in order to benefit from economies of scale and gain an upper hand in negotiating pricing with content producers. The possible merger of Comcast and Time Warner Cable has worried smaller rivals.
Furthermore, the television content distribution market has become rather crowded, with Verizon Communications Inc.’s (VZ) FiOS and AT&T Inc.’s (T) U-Verse services looking to expand their presence in major regions.
In addition, a seismic shift in the industry toward online streaming of content has alarmed companies like Dish and DirecTV even more. Stiff competition from newer online video services – like Google Inc.’s (GOOG) YouTube, Netflix Inc. (NFLX), and Hulu LLC – pulled away almost 250,000 subscribers from pay-TV services last year. Most were cable TV customers, most notably those of Time Warner Cable.
While satellite-TV subscribers actually grew by around 170,000 last year, the sector’s current growth rate compared to only a few years ago indicates a sharp slowdown. Both Dish and DirecTV have looked to shore up their position in the video content distribution market by introducing innovative new services like internet and mobile TV applications, and by going for strategic acquisitions.