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The TV industry is buzzing about a potential Dish-DirecTV merger. Here's why Wall Street analysts say the deal finally has a chance.

Business Insider | Jun 11, 2019, 09.13PM IST

Randall Stephenson, CEO of AT&T (2nd L) and Michael White, CEO of DirecTV (L) testify before the Regulatory Reform, Commercial and Antitrust Law Subcommittee of the House Judiciary Committee June 24, 2014 on Capitol Hill in Washington, DC. The subcommittee heard testimony on the proposed merger between AT&T and DirecTV.

Win McNamee/Getty Images

AT&T CEO Randall Stephenson (2nd from left) and former DirecTV CEO Michael White testify before the House Judiciary Committee in 2014 on the proposed merger between AT&T and DirecTV.

  • Major US satellite-TV providers DirecTV and Dish Network are open to a merger, according to Bloomberg.
  • While no talks are currently ongoing, analysts at UBS and JPMorgan have made compelling cases for consolidation in the US satellite-TV space.
  • A merger could help both companies save money at a time when satellite-TV subscribers are dwindling.
  • But, AT&T may have to take a back seat in the pay-TV businesses it spent $49 billion to acquire just four years ago, for a deal to work.
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Seventeen years after a failed merger attempt between Dish and DirecTV, the US' two main satellite-TV companies may be willing to try another union. DirecTV, now owned by AT&T, and Dish are once again open to a merger, Bloomberg reported on Friday, citing people familiar with the companies' thinking.

DirecTV and Dish are not currently in talks for a deal, as far as Business Insider is aware. AT&T and Dish declined to comment on the merger speculation. However, analysts at UBS and JPMorgan have made compelling cases for consolidation in the satellite-TV space.

The pay-TV industry has changed a lot since US regulators first spiked DirecTV and Dish's proposed merger in 2002, and talks swirled again in 2014.

Traditional pay-TV providers are losing subscribers more and more rapidly, and satellite services including DirecTV and Dish are experiencing some of the worst losses. Both DirecTV and Dish have turned to online-TV alternatives, like DirecTV Now and Dish's Sling TV, to keep customers around. But growth has recently slowed at those services as well. The industry challenges may be opening up the satellite companies - and US regulators - to the idea that consolidation could be satellite TV's best chance of survival.

The pay-TV landscape

DirecTV and Dish's satellite subscriber base has shrunk to about 28 million total in the US, as of the first quarter - or nearly one-third of all major pay-TV subscribers - Leichtman Research Group, a media and entertainment research firm, estimated. Overall satellite subscribers peaked in the US at around 34 million in 2012, according to JPMorgan. And, while there are still about 10% of households for whom satellite TV is the main, or in some cases only, option for traditional TV, that share should dwindle as broadband access improves in the country.

Meanwhile, virtual pay-TV services, including Hulu Live and YouTube TV, are the only pay-TV category still growing their subscriber bases, and subscription-video-on-demand services like Netflix are lessening the need for traditional pay-TV services altogether.

Read more: Wall Street analysts forecast a major power shift in the streaming TV market, with Hulu and YouTube surging while others falter

US regulators may not block a merger

In this environment, where satellite-TV companies are competing against a great many other video services, US regulators may not stand in the way of a merger, UBS analysts wrote in a Jun. 6 note to investors.

JPMorgan wrote in a Jun. 10 investor note that the hypothetical combined company could also offer price guarantees and commit to building broadband in underserved areas, to assuage any fears.

Consolidation, meanwhile, could help the two companies save up to $2 billion a year, from lower programming, distribution, and administrative costs.

What the combined companies might look like

The most likely structure would be AT&T selling its video assets to Dish, and keeping a minority stake for itself, both analysts wrote.

AT&T took on debt to acquire Time Warner last year and has committed to paying off up to $20 billion of it this year. Spinning off the DirecTV satellite could free up more cash for AT&T to pay down its debt, UBS wrote. AT&T recently unloaded its stake in Hulu to that end. AT&T also declared in November that it had launched its last satellite, and is instead focusing on making its video businesses more profitable.

But AT&T has also sunk a lot of money into its pay-TV businesses, in an effort to get more out of its core wireless and growing broadband customers by selling them video services.

AT&T acquired DirecTV in 2015 for $49 billion. It has since been expanding its broadband access, in part so it can better deliver online video to more people.

AT&T is building a new streaming-TV service through a box, dubbed Osprey, which it expects will ultimately replace its satellite service. It has another internet-based TV service, U-verse. And it recently revamped its skinny streaming-TV bundles, including DirecTV Now and Watch TV.

It acquired Time Warner, now WarnerMedia, for $85 billion in 2018, which gave the company more access to content, as well.

What AT&T might have to give up

For AT&T, spinning off the satellite business alone might be counterproductive, according to the JPMorgan note. Without DirecTV, it would be harder for AT&T to negotiate content deals for its remaining video services.

"We believe the dis-synergies of pulling DirecTV away from AT&T's U-verse in buying power would be value destructive," the JPMorgan note said. "AT&T would be left where it started - trying to negotiate content deals for U-verse, DirecTV Now, and the pending 'Osprey' product from a sub-scale content position. Additionally, we don't see how DirecTV Now and Sling would not be part of the combined video platform - neither have the scale to survive on their own."

For a deal with Dish to work, AT&T might need to spin off all its pay-TV businesses, and take a backseat in a vehicle it has bet heavily on over the last four years - despite it weighing on the broader business as subscribers and operating revenue slump.

Is the timing right?

The timing may not be right for a deal between the two companies - yet.

The 2020 US presidential race is underway. AT&T saw what pushing through a merger during a heated election cycle can do. Its deal with Time Warner became a frequent talking point during the 2016 election and was ultimately fought by the Justice Department.

It may be smarter for DirecTV and Dish to wait until after the election than "risk becoming a political punching bag around the election," as JPMorgan put it.

On the other hand, with a Republican-controlled Federal Communications Commission and Department of Justice currently installed, these may be DirecTV and Dish's best odds of finally getting a deal done.

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