Arguments for an agreement between Dish and DirecTV of AT & T

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Another Wall Street analyst weighed the potential advantages and disadvantages of a merger between
Dish Network

(DISH) and
AT & T
of the
(T) DirecTV, and he says the deal should be concluded.

Under the pressure of cord cuts and television viewing via streaming services, both satellite operators have been faced with an exodus of subscribers in recent years. according to Philip Cusick J.P. Morgangaining size through a combination could be the way for satellite TV to stay competitive with other home video options.

"The video ecosystem is rapidly evolving into a broadband-based world, making the traditional satellite TV platform the fastest," wrote Cusick in a report released Monday. "As the construction of the rural broadband using copper, fiber optic and wireless advances, supported by public funding, the natural satellite TV customer base is shrinking every year and will end up having a hard time justifying two , even a single constellation of [direct broadcast satellites]. "

Hooking up satellite TV subscribers by bundling other services such as the Internet at home or telephone services is not an option for Dish, which has no network Wired and which was harder to sell for AT & T than management would have imagined by buying DirecTV in 2014. Dish lost 10% of its subscribers last year, while DirecTV lost 6%, accelerated this year by promotional periods ending for many customers.

Although merging the two satellite activities would be simpler from the point of view of execution and would create the largest US home TV player by subscriber market share – with 31%, or 25.4 Millions of Subscribers – Cusick believes that it is not enough that AT & T to direct DirecTV's satellite operations would have a destructive value for the rest of its video services. The company's U-Verse cable television service and DirecTV Now live-TV offer would have reduced the scale and bargaining power with content providers, which would have allowed the television unit AT & T to return to normal before its acquisition of DirecTV.

Cusick recommends combining all AT & T TV customers with Dish, which also offers a live streaming service, Sling TV. The combined entity could achieve annual savings of approximately $ 2 billion, primarily through an estimated reduction in programming expenditures of $ 825 million. More single contract subscribers mean greater bargaining power with channel owners like CBS (CBS),
Fox

(FOX), or
Viacom

(VIAB) for lower rates. Cusick is modeling a 0.5% reduction in monthly subscriptions – or customer failures – as subscribers can no longer switch between Dish and DirecTV, saving $ 600 million in annual acquisition costs. Over time, with the decommissioning of older satellites and the elimination of any other redundant network equipment, operating expenses could decrease by $ 200 million a year.

Cusick models AT & T by taking a minority stake in the combined entity, with 49% versus 51% for Dish. After the purchase of Time Warner by AT & T after the $ 106 billion purchase of Time Warner, he estimates that the deal, along with an additional $ 7 billion of debt on the new company, could to reduce its borrowings by $ 22 billion. Cusick calculates that the combination of Dish / DirecTV could have a business value of more than 50 billion dollars. But he is not optimistic about his prospects. He estimates that about one – third of the 29 million combined subscribers will default by 2025 and that the company 's value will fall to $ 48 billion by 2022.

Reducing AT & T's participation to less than half could also reduce regulators' opposition to a possible deal. Previous incarnations of Dish and DirecTV had attempted to merge in 2002, but the Federal Communications Commission had blocked the market for competitive reasons. But in a world characterized by greater reach of cable and broadband, dozens of live and on-demand streaming services and a dwindling user base, the merger should be easier to approve.

"It is in this highly competitive context that we now believe that regulators could potentially allow the combination of satellite / DBS readers due to its obsolete technology, its structural problems (impossibility of grouping), as well as the emergence of broadband video – which is becoming the predominant form of video consumption in recent years, "wrote Cusick. "So, while a combination today would give a share of 33% of traditional pay TV households, we think that the trends seen across the entire video ecosystem will make it more justifiable in several years "

In order to avoid antitrust-related consolidation issues in rural areas where satellite is the only option for television broadcasting, Cusick believes that long-term price guarantees in the domestic market may be sufficient to secure the approval of fusion.

The companies did not indicate that they were interested in an agreement and Cusick's analysis is based only on the financial implications of a possible combination. "Let's be clear, we do not think companies are being discussed today, and we are seeing both regulatory and personality issues that need to be overcome in order to reach an agreement," he wrote.

The Dish action was up 1.4% Monday morning at $ 37.60, up from a 0.8% gain for the S & P 500. Cusick is overweight and is targeting a target of $ 40. AT & T action fell 0.9% Monday to $ 32.18. Cusick also gives him an overweight and is aiming for a price of $ 38.

Write to Nicholas Jasinski at [email protected]