Story Stocks^®

The emergence of streaming services such as Netflix (NFLX) and Walt Disney's (DIS) Hulu and Disney+ ignited a cord-cutting trend that continues to decimate the traditional cable and pay TV markets to this day, but it also may have paved the way for a merger between DirecTV and Dish Network to finally materialize. After Bloomberg reported on September 13 that AT&T's (T) DirecTV and EchoStar's (SATS) Dish Network were involved in merger negotiations, the two companies announced this morning that a deal to combine the satellite TV services was reached.

• Many years before streaming even existed, DirecTV and Dish attempted to join forces through a merger that would've created a pay TV powerhouse at the time, but regulators shot the deal down in 2001 due to anti-competitive concerns. Fast forward twenty-three years later, and it seems implausible to think that the combination of two satellite TV providers would be viewed as a serious threat.
  • With the advent of streaming, DirecTV and Dish have experienced a dramatic fall from grace, as evidenced by the 7-8 mln estimated subscriber losses for DirecTV over the past decade, and the 6-7 mln in subscriber losses for Dish during this same period. 
• As a result of their much weaker competitive standings, it's widely believed that U.S. regulators would give a DirecTV and Dish merger the green light this time around. Furthermore, while a combination between the two likely would do little to slow the cord-cutting trend in the long run, a more competitive satellite option may actually be a positive for the consumer.

From a company-specific perspective, the transaction should be beneficial for both AT&T and SATS, although SATS is experiencing a nasty selloff today.

• Since the beginning of September, SATS had rocketed higher by 55% prior to today's losses, bolstered by the aforementioned Bloomberg story from a couple weeks ago. So, there is a sell-the-news factor at play, but the weakness may also be related to shareholders balking at the terms of the deal. For instance, there could be some disappointment regarding the cash component of the transaction, which amounts to a relatively modest $1.0 bln.
  • DirecTV will be assuming about $9.75 bln in Dish's debt, but there is some uncertainty regarding this part of the agreement. Specifically, Dish's bondholders would have to agree to the principal amount on at least $1.57 bln in debt being reduced in order to compete the debt exchange offer.
• If the deal is finalized, then SATS' balance sheet, which held over $24.0 bln in debt as of the end of Q2, would be in a significantly healthier position. The company would also be freed up to focus on its Boost Mobile wireless segment, which it has poured billions of dollars into in recent years as it constructs towers and purchases spectrum licenses. Relatedly, SATS received some good news on September 20 when the FCC granted its 5G buildout framework for Boost Mobile.
• For AT&T, the deal also allows it to finally exit the satellite TV business. In 2021, the company took a step forward in those efforts, selling a 30% stake in DirecTV to private equity firm TPG, netting about $16.0 bln. In connection with today's merger, AT&T sold the remaining 70% stake to TPG for an expected $7.6 bln in cash payments from DirecTV through 2029.

The main takeaway is that consolidation was needed as both DirecTV and Dish have been crushed by streaming platforms. Not only will the combination of the two provide for cost synergies of at least $1.0 bln per year, but it will also put the combined company in a stronger position to negotiate with programmers. With that said, it's hard to imagine that this merger will have a lasting and material effect on the competitive landscape in the TV/streaming market with no end in sight to the cord cutting phenomenon.