The rise of streaming services like Netflix (NFLX, Financial) and Walt Disney's (DIS, Financial) Hulu and Disney+ has severely impacted the traditional cable and pay TV markets. This shift may have finally set the stage for a merger between DirecTV and Dish Network. On September 13, reports surfaced that AT&T's (T, Financial) DirecTV and EchoStar's (SATS, Financial) Dish Network were in merger talks. Today, the two companies announced that they have reached an agreement to combine their satellite TV services.
- Years before streaming existed, DirecTV and Dish attempted to merge in 2001, but regulators blocked the deal due to anti-competitive concerns. Fast forward twenty-three years, and a merger between two satellite TV providers is unlikely to be seen as a serious threat.
- Both DirecTV and Dish have suffered significant subscriber losses due to the popularity of streaming, with DirecTV losing an estimated 7-8 million subscribers and Dish losing 6-7 million over the past decade.
- Given their weakened market positions, it is widely believed that U.S. regulators will approve the merger this time. Although it may not slow the cord-cutting trend, a more competitive satellite option could benefit consumers.
This transaction should be beneficial for both AT&T and SATS, although SATS is experiencing a selloff today.
- SATS had surged by 55% since the beginning of September, driven by the merger news. Today's selloff may be due to a sell-the-news reaction and shareholder concerns over the deal's terms, including a modest $1.0 billion cash component.
- DirecTV will assume about $9.75 billion in Dish's debt, but there is uncertainty as Dish's bondholders need to agree to reduce the principal amount on at least $1.57 billion in debt for the debt exchange offer to proceed.
- If finalized, SATS' balance sheet, which had over $24.0 billion in debt as of Q2, would be significantly improved. The company could then focus on its Boost Mobile wireless segment, which has received substantial investment. Recently, the FCC approved SATS' 5G buildout framework for Boost Mobile.
- For AT&T, this deal marks its exit from the satellite TV business. In 2021, AT&T sold a 30% stake in DirecTV to private equity firm TPG for about $16.0 billion. With today's merger, AT&T sold the remaining 70% stake to TPG, expecting $7.6 billion in cash payments from DirecTV through 2029.
The key takeaway is that consolidation was necessary as both DirecTV and Dish have been heavily impacted by streaming platforms. The merger will provide cost synergies of at least $1.0 billion per year and strengthen the combined company's negotiating position with programmers. However, it is unlikely to significantly alter the competitive landscape in the TV/streaming market, given the ongoing cord-cutting trend.
