EchoStar Continues To Rise on Acquisition Speculation

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Includes: DISH, T
by: Eric Savitz

EchoStar (NASDAQ:DISH) on Wednesday continued its recent climb, apparently on continued speculation that the company’s plan to split into two companies could lead to a sale of the DISH Network satellite TV service to AT&T (NYSE:T).

Analyst commentary about the prospects for such a deal over the last several days have been skeptical. J.P. Morgan’s Jonathan Chaplin yesterday declared in a note that he believes the chances of a DISH acquisition by AT&T to be “unlikely.”

He says the strategic benefits of such a deal would be “modest,” since it can already serve customers outside the reach of its U-verse television service by partnering with EchoStar. He does say that the company could reduce G&A expenses at DISH, and cut programming expenses for U-verse. He puts such savings at $200 million in year 3, and $300 million by year 5. He says a deal would be modestly dilutive in year 1, and 2% accretive in year 3.

“Although we view the likelihood of a deal as low, [AT&T] management did not dismiss the possibility of a deal during our meetings [with them] in August,” he writes. “Management mentioned that a deal would lower programming costs. Net net: If T wants DISH they can easily get the deal done; they can justify the deal on programming scale and the deal would be accretive over time. However, our overall impression is that the odds are against it happening.”

Merrill Lynch’s Jessica Reif Cohen also expressed some skepticism about the prospects for a deal with AT&T in a note yesterday. “While convenience and savings may attract consumers to the bundled offering, the value for operators derives primarily from leveraging a common plant,” she writes. “A purchase of a satellite video distribution platform, which is essentially entirely separate from AT&T’s wireline network, would offer far less potential synergy than cable operators have achieved through common network infrastructure. The question for AT&T, as we see it, is whether the value gained by having an established video offer in-house, rather than through a marketing arrangement, is worth over $2,000 per subscriber.”