AT&T Deal Could Benefit EchoStar

Mar 13, 2006  •  Post A Comment

While the proposed merger of AT&T Inc. and BellSouth has put an even brighter spotlight on the battle for customers between the telephone companies and cable operators, the marriage is likely to have a significant impact on the satellite sector as well.

Both DirecTV Group and EchoStar Communications have partnerships with the phone companies involved in the merger, dating to when the phone companies were looking to compete with cable’s three-pronged service package of voice, video and data and had not yet firmed up their own plans to offer video services. Wall Street analysts expect the status of those relationships to change once the $67 billion deal is completed, in about a year.

EchoStar, which has just under 12 million subscribers, is generally seen as a beneficiary of the merger. The satellite company has had a marketing relationship since 2003 with AT&T in which the phone company sells EchoStar’s video products in the 13 states where AT&T does business. Many analysts believe the relationship will be expanded into the BellSouth markets once the merger closes.

The impact of the deal on DirecTV, meanwhile, is murkier. If AT&T expands its EchoStar relationship into the BellSouth region, it will come at DirecTV’s expense. That could be bad news for DirecTV, which at a recent analyst presentation indicated that it will be relying in part on its telco relationships, including one with BellSouth, to help it reach 18 million subscribers by 2008.

At the end of 2005, the BellSouth relationship accounted for 523,000 DirecTV subscribers, a number that is expected to grow further given that DirecTV and BellSouth extended their partnership for another five years in February. In addition to BellSouth, DirecTV counts as telco partners Verizon Communications and Qwest Communications International.

Aryeh Bourkoff, an analyst at UBS Securities, estimates that over the next three years as much as 50 percent of DirecTV’s net new subscriber additions could come from the telco relationships, so a loss of the BellSouth tie, which he thinks is likely, could put downward pressure on the satellite operator’s subscriber-growth targets.

In addition, things could get tougher for DirecTV if AT&T begins aggressively rolling out the fiber-based video product it is developing on its own. Then, as Bernstein Research analyst Craig Moffett noted, DirecTV would not only lose a key distributor but also gain another competitor.

DirecTV spokesman Robert Mercer said it was premature to determine what sort of impact the AT&T-BellSouth merger could have on DirecTV’s relationship with BellSouth.

“We have always enjoyed a strong relationship with BellSouth and will continue to work with them to bring a superior entertainment and communications services bundle to customers in BellSouth’s territory,” Mr. Mercer said.

An EchoStar spokeswoman declined comment.

The worry about the future of the DirecTV-BellSouth relationship was enough to buffet DirecTV’s stock last week. Prices fell 1.8 percent Monday to $15.48 a share before recovering Tuesday to $15.54 and falling again Wednesday to $15.46. By Thursday, DirecTV’s stock closed at $15.52 a share.

EchoStar shares, meanwhile, were up as much as 2.5 percent Monday before settling up just three cents to $29.13. By Thursday, however, EchoStar shares were down to $28.73 a share.

Analysts said part of EchoStar’s decline could be the result of cold water being thrown on the notion that AT&T might one day acquire EchoStar. Nearly three years ago, AT&T, then SBC Communications, invested $500 million in EchoStar as part of the marketing agreement they inked, and ever since then speculation has surfaced occasionally that the phone company would acquire EchoStar.

“The notion of an AT&T acquisition of EchoStar can definitively be put to rest [for now],” Mr. Moffett wrote in a research note.