EchoStar’s Ergen not out of game yet

Jan 27, 2003  •  Post A Comment

In a strange and unexpected way, Charlie Ergen’s EchoStar Communications is winning the domestic satellite derby, at least perceptually, for now.
After losing his bid to take over dominant rival DirecTV late last year, it seemed as though Mr. Ergen had nowhere to go but out. Conventional wisdom has been that Rupert Murdoch’s News Corp. and its 20 percent owner Liberty Media Corp.’s anticipated second bid for DirecTV would steamroll past him, leaving his pure-play domestic satellite operation at a distinct disadvantage. And that may still occur.
But for now, EchoStar appears to be benefiting from the renewed DirecTV hubbub that is now in full swing. The recent speculation that Mr. Ergen has approached News Corp. about partnering with or buying EchoStar-however outrageous or untrue-contributes to the distraction and delay of a renewed bidding process that already is off to a slower-than-expected start.
Media executives who know Mr. Ergen and Mr. Murdoch will say there is no way the two could ever so amicably do business. Some speculate that Liberty’s consummate deal-making chairman, John Malone, is making behind-the-scenes moves. Liberty and News Corp. declined comment. Underscoring the heaps of bravado at work in such discussions or speculation, a source close to the situation said Mr. Ergen would not settle for anything less than $60 a share even if he were selling. Mr. Ergen, whose company’s stock has been trading around $25 a share, could not be reached for comment.
While Mr. Ergen manages to keep Wall Street and his competitors wondering about his intentions, his company clearly has been hustling. If EchoStar looks good these days, it is due to its strong financial performance, analysts say.
The reason is its stronger financial performance. “Hughes’ financial performance, relative to the smaller EchoStar, is weaker,” said William Kidd, analyst at Lehman Brothers, who concedes he is taking a more contrarian view than many of his peers.
“Right now EchoStar is putting out some phenomenal numbers, which you have to attribute to solid execution. It is rapidly gaining market share and generating more cash flow,” he said. “Charlie is just running a leaner ship and negotiating tougher deals.”
Mr. Kidd expects a hustling EchoStar to add 1.1 million subscribers in the next year, compared with about 700,000 new subscribers for DirecTV.
Despite those gains, EchoStar, which has not yet reported its fourth-quarter numbers, trades only at a slim 6 percent premium to DirecTV, or at an estimated $1,640-per-subscriber multiple, Mr. Kidd said in a recent report.
To its credit, DirecTV, whose comparable performance statistics are part of the publicly traded General Motors-owned tracking stock Hughes Electronics, has been cutting costs and improving operating performance in recent quarters.
The company says it has deliberately shifted its focus to profitability and pursuing high-end subscribers who will stay longer and spend more money on more services. DirecTV says its fourth-quarter ARPU was up to an industry high of $64 a month, with lower subscriber turnover than its competitor, while reducing operating expenses and subscriber-acquisition costs.
Analysts say that despite Hughes’ making its best case to Wall Street that it is tending to business, there is no telling how much of a toll another 18 months of deal-making and regulatory scrutiny will take. Perhaps even more disconcerting to analysts is whether a new owner such as News Corp. will sufficiently address any operating concerns before it begins mining the satellite distribution base for profits and pricing power.
Despite its dominant market position, DirecTV is losing share. It could use the support of a sizable independent dealer network, more centralized management and a much lower cost structure-the kinds of changes it would take News Corp. or any new owner time to institute.
At the same time, News Corp. could seek to impose some of its own related businesses, such as the Gemstar-TV Guide interactive guide or the NDS encryption services, on DirecTV, analysts say.
Of course, all of this will unfold while the satellite industry overall continues to undergo more change. Industry analysts say satellite will increasingly mirror its cable competitors as it becomes less driven by gross subscriber numbers and more focused on the quality of multiservice subscribers. Satellite companies, not burdened by the debt or the capital costs of their cable rivals, could begin to expand in related areas such as content and services as a way of maintaining and attracting customers.
EchoStar is seeking to grab many more rural customers it can better serve, to boost its current 8 million-customer base to about 12 million within five years, Mr. Kidd said. DirecTV is expected to grow its subscriber base to 13.6 million by 2008 from a current 11 million subscribers.
The tricky part for both satellite players will be raising rates. Earlier this month, EchoStar said it will raise rates by $2 on four DISH Network packages, which analysts view as a plus for cable operators selling to the same customers. That kind of pricing competition is considered satellite’s biggest risk in losing market share to cable.
Keeping things interesting
“EchoStar may be smaller, but it’s far more profitable, and Charlie Ergen is smart enough to know how to ride out that strength for at least several years,” Mr. Kidd said.
“Hughes has to be much more concerned about the way EchoStar executes than EchoStar being concerned about the way Hughes executes. But they both need to be concerned about cable,” Mr. Kidd said.
Industry analysts and experts say they cannot imagine Mr. Ergen and Mr. Murdoch working together after so masterfully working at manipulating and foiling each other’s efforts. (Last year’s DirecTV fiasco wasn’t the only such standoff between EchoStar and News Corp., which was stymied by Mr. Ergen five years ago from grabbing as much as half ownership in EchoStar.) On the other hand, when it comes to business, anything is possible.
“In time, say two years, when he realizes he can’t add value to a mature business as a midsize pay TV operator, then another media entity could take EchoStar to another level,” Mr. Kidd said. “I would think that when you are in the middle of building that kind of value, it would be hard to get Charlie Ergen with the company at this time.”
With 50 percent voting control of the company, Mr. Ergen controls its destiny.
In the end, for EchoStar and DirecTV to join forces, with or without News Corp., may be the only way satellite competes against cable over the long haul, analysts said.
Until then, analysts point out, Mr. Ergen can hum along fairly undistracted in aggressively running his business while keeping things interesting for DirecTV and News Corp. simply by being savvy.
The general industry consensus is that the News Corp.-Hughes deal eventually will happen, and that the current posturing by the players reflects the behind-the-scenes bickering about price. The risk is how much Hughes and its DirecTV unit get pushed around this time in the process.
In the meantime, News Corp. and GM may become their own worst enemies in the unfolding bidding process. Each wants to give the other the impression that it has other options.
“Each of these players is going to try and use the other to get what they want,” said one high-level cable operator.
The GM board is expected to review various options at a regularly scheduled Feb. 4 meeting. Those include doing nothing with Hughes, spinning it off completely as a stand-alone company or bringing in eager equity investors.
For its part, News Corp. wants to give the impression that it, too, has options-such as pursuing EchoStar or the new satellite service that Cablevision Systems launches in March.
Although well-funded larger players seeking more distribution, such as Viacom and NBC corporate parent General Electric, have been mentioned as possibly entering the fray, industry experts say that is not likely since such an acquisition would dilute their earnings.
eanwhile, News Corp., which has spent the past 18 months strengthening its balance sheet and putting its necessary financing in place, has more aggressively sought to unload non-core assets such as the Los Angeles Dodgers baseball team in final preparation for making a new bid for DirectTV.
The consensus is that the News Corp. eventually will acquire at least GM’s 30 percent stake in Hughes Electronics, which analysts value at more than $4.5 billion, as a first step to eventually acquiring all of DirecTV.
By comparison, all of EchoStar is valued at more than $12.5 billion.
“It think combinations like News Corp. and DirectTV will likely lead to a stronger satellite industry one way or another,” Mr. Kidd said. “But the real winner may be determined more by the process of just getting there.”