The case to merge DirecTV (DTV) and Dish Network (DISH), two of the largest satellite TV providers, is becoming more compelling in light of the companies’ recent lackluster earnings.
In its latest quarter, DirecTV — the nation’s biggest satellite TV provider — saw its net income fall to $660 million, or $1.18 per share, lagging the $1.34 profit expected by Wall Street analysts because of disappointing performance at its Latin America business. The company’s $7.7 billion revenue figure was just shy of the consensus forecast of $7.74 billion, and DirecTV’s loss of 84,000 U.S. subscribers was worse than the 74,000 drop that analysts expected.
The picture was similar at Dish Network.
Dish, the No. 2 satellite provider, just reported a net loss of $11 million, or 2 cents per share, as earnings were depressed by a charge related to satellite acquisitions. Revenue rose 1% to $3.61 billion. Wall Street expected the company to earn 54 cents on revenue of $3.65 billion. Dish also fell short on the subscribership side, adding 624,000 gross pay-TV subscribers — down from 665,000 in the year-ago period and well short of Wall Street expectations for 648,000.
The broader problems facing both companies are pretty straightforward.
On one hand, media companies are continuing to push for ever-higher fees from satellite and cable providers. Costs for original programming such as sports have skyrocketed in recent years and show no signs of slowing down.
However, consumers are increasingly getting fed up by being charged big bucks for channels they never watch, while pay TV providers are grumbling about having to broadcast less popular channels from media companies to get access to the popular ones.
The market also is maturing, and the potential for growth is limited … making a merger between the two seem like at least a somewhat palatable way to make a spark.
The idea should ring a bell with investors since it’s been tried before. The U.S. Department of Justice blocked the efforts of Dish Network — then called EchoStar — to buy the parent of DirecTV on antitrust grounds in 2002. That’s ancient history in the telecom world, though, and not relevant to today.
As Bloomberg News noted, the two companies combined would have 34 million customers and would top Comcast (CMCSA) as the largest provider of pay TV. By working together, they would have considerably more leverage with media companies in negotiating retransmission agreements with media companies.
Craig Moffett, one of the most respected Wall Street analysts covering cable, has called the synergies that the two companies would achieve through a merger “staggering,” reaching a potential of $40 billion on a net present value. DirecTV CEO Mike White was quoted as saying that he would “never say never” to joining forces with Dish Network, and billionaire John Malone — chairman of Liberty Media (LMCA) — urged Dish Chairman Charlie Ergen, who also is a billionaire, to merge his company with DirecTV.
Ergen has other ideas, though. He tried and failed to thwart Softbank’s (SFTBF) takeover of Sprint (S) and the telecom firm’s acquisition of the stake in Clearwire (CLWR) that it didn’t already own. Next on his list may be T-Mobile US (TMUS). The Wall Street Journal reported that Ergen has expressed an interest in buying the U.S. affiliate of Germany’s Deutsche Telecom (DTEGY). T-Mobile US chief John Legere is quoted as saying that he was “intrigued” by Ergen’s idea.
As the Wall Street Journal noted, Ergen is known for being “famously hard to read.”
However, the one-time professional gambler might have a few more tricks up his sleeve, but all the sleight of hand in the world can’t change the challenging macroeconomic environment pay TV faces.
What does that mean for investors interested in either DISH or DTV right now?
Avoid ‘em. Ergen clearly marches to the beat of his own drum, and many theoretical mergers that seem good on paper never materialize anyway.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. Contact him at @jdberr.