Dish Network (DISH) late Tuesday disclosed that AT&T (T) has exercised an option to terminate the relationship under which Ma Bell sells Dish access to its customers. The termination is effective December 31.
Just two weeks ago, AT&T exercised its right to put back to DISH a $500 million convertible note due July 21, 2010.
Craig Moffett, an analyst with Bernstein Research, says that AT&T describes the termination as “procedural.” But he notes that it likely means AT&T will now open negotiations with both Dish and its rival DirecTV (DTV).
“Nevertheless, today’s announcement is not good news for DISH and dramatically increases the risk that the AT&T relationship now shifts to DTV,” he writes. “The news strikes a heavy blow to Dish Network, which is already suffering from a steep decline in net additions.” Moffett says the AT&T deal likely contributes as much as 15% of Dish Network’s gross subscriber adds. Loss of the deal would likely lead to negative subscriber growth for the company in 2009, he says.
In after hours trading Tuesday night, DISH fell 86 cents, or 3%, to $28.25.
As you might expect, Dish Network (DISH) shares are lower Wednesday following the company’s disclosure Tuesday night that AT&T (T) has notified the company that it will terminate their distribution agreement at year end. The odd thing is that DirecTV (DTV) shares have barely budged on the news, despite the fact that they would be the obvious beneficiary if AT&T decided to change satellite television partners.
But the Street instead is apparently interpreting the news as a negotiating ploy, rather than a clear signal of plans to switch its relationship from DISH to DTV. Jamie Townsend, an analyst with investment research firm JRPG, asserted in a note this morning that it is more likely that the company stays with DISH but on improved terms.
He notes that switching vendors would create issues for AT&T. “There are hard costs associated with changing billing systems, marketing programs, collateral materials and training,” he notes. “It is not unusual for business to be interrupted or decline during switches of this magnitude.” He notes that DISH is playing catch up to DTV in high definition, but that DirecTV’s lead “provides a powerful argument for AT&T to change the price or terms of its distribution deal” with DISH.
On the other hand, if AT&T really did switch, it would leave DISH without a major telco distribution partner, since both Verizon and Qwest are aligned with DTV. Several analysts cut their price targets on DISH on the news; Kaufman’s Todd Mitchell went to $36, from $39, while Lehman’s Vijay Jayant went to $43 from $46.
DISH Wednesday is off $1.61, or 5.5%, to $27.50; DTV is up 6 cents, or 0.2%, to $25.70.
