EchoStar Spinoff Creates A Few M&A Possibilities

Includes: DISH, T
by: Philip Frank

The telecommunications and media landscape is evolving as mobile networks and devices assume more and more prominence as firms strive for control of the underlying software, hardware, content, and networks.

EchoStar Communications (NASDAQ:DISH) has significant strategic value in this process. A spinoff entity from EchoStar will become effective 1/1/2008. This entity will house EchoStar’s infrastructure assets [SATS], while the remaining entity will be comprised of EchoStar’s pay-TV business (the new Dish).

We have an interest in both entities post-spin. This is a special situation where value is fairly independent of what the overall stock market does. There is some belief on Wall Street that AT&T (NYSE:T) is interested in the non-spun entity, the new Dish. There is a law that, except in certain circumstances, in the event of a spinoff , a stock deal cannot be done for two years afterward.

So it would appear that an AT&T purchase is less likely (they could always do a cash deal), post the spin off. Perhaps this means a DirectTV (DTV)-EchoStar deal is more likely. Based on reports, it looks like there are $3 billion in synergies to be gained from a DirectTV or AT&T merger. That works out to about $44 per a new Dish share (tax effected with a 10 PE slapped on synergies).

So even if the synergies are split evenly with the acquirer, there should be $20 per share upside to the new Dish if it is acquired. I think this EchoStar’s spinoff is ultimately about an acquisition, either by AT&T or the new Liberty Entertainment and DirectTV. As far as SATS, as an infrastructure company, it may get a higher valuation.

Post-spinoff, we have an interest in both the new Dish and SATS. This deal also underlies Insight’s interest in the spin creating Liberty Entertainment by Liberty Capital which will contain a big chunk of DirectTV. Given the possibility of a Democrat controlled White House and Congress in 2009, there is some pressure I believe to get mergers done in 2008. This factor also provides impetus for an EchoStar deal.

Full Disclosure: Insight Asset Management LLC's model portfolio currently has long positions in Liberty Capital and EchoStar

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