EchoStar's a Buy on AT&T Buyout Speculation

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Includes: DISH, T
by: Notable Calls

Citigroup is out with a groundbreaking call on Echostar (NASDAQ:DISH), saying the shares have been very strong over the last few weeks with most of the run occurring after EchoStar put out a press release suggesting it was contemplating a tax-free spin of some of the non-core assets.

They think some of the run-up stems from investors that believe the spin is related to a possible tie-up with AT&T (NYSE:T). Firm suggests the likelihood is fairly high that the SpinCo announcement is linked to an AT&T acquisition of EchoStar.

This view is based on the following:

1) A non-core asset spin is inconsistent with management's prior philosophy of shunning financial engineering.

2) Even if management embraces a new philosophy, SpinCo creates - but does not maximize - shareholder value.

3) By excluding the core satellites from SpinCo, EchoStar has isolated the assets AT&T may be interested in (customers, orbital slots, core satellites) from those they are not (set-top box design and manufacturing, wholesale transponder capacity).

4) If AT&T and EchoStar have had substantive M&A discussions, the creation of a tax-free SpinCo will likely preclude AT&T from acquiring the assets for two years. Thus, SpinCo may be designed to "force" AT&T's negotiating hand.

5) Press reports suggest EchoStar is asking for $65 per share. This makes sense to Citi based on current sub base + its ability to merge with DirecTV in the future ($41 + $27 = $68).

The bottom line, in firm's view, is that SpinCo is good for EchoStar shareholders in its current form. However, they think there is a 65% chance EchoStar is acquired by AT&T within the next 12 months. Maintains Buy rating on DISH with a $59 price target.

Notablecalls: What can I say, grab all the DISH stock you can in the $1-$2 buck range from yesterday's close. It's not every day you see a firm coming out saying there's a 65% chance of a company being acquired with a close to 40% premium. That's bound to generate interest!

Actionable call alert!

Disclosure: author has no positions in stocks named.