PARIS — EchoStar Corp. management on Feb. 21 fought a wave of investor antipathy following its announcement of a deal with sister company Dish Network to transfer 80 percent of EchoStar’s Hughes Network Systems’ retail consumer satellite broadband business to Dish.
In return, EchoStar will take ownership of five Dish-owned satellites that are expected to add at least $145 million to EchoStar’s revenue in 2014. Dish added $11 million in cash to the deal.
The transaction, which EchoStar Chief Executive Michael T. Dugan conceded is confusing, will create a tracking stock that will own 80 percent of Hughes’ North American consumer satellite broadband business — but only the retail side of it. EchoStar will keep the wholesale piece of the business, which EchoStar officials sought to portray as accounting for the lion’s share of Hughes’ future consumer broadband revenue growth potential.
Englewood, Colo.-based EchoStar and Dish Network are both owned by Charlie Ergen, who has made a habit of managing transactions without a lot of explanation to investors.
But few of them have resulted in an immediate 8 percent drop in the stock price, which is what happened to EchoStar shares on the news of the Hughes transaction.
In a conference call with investors during which little else was discussed, EchoStar officials promised they would craft a document that better explains their view of the deal’s advantages for their shareholders. They did allow as how no other possible counterparty was consulted before concluding the deal with Dish, the better to reduce the tax liability of the transaction.
One investor suggested that EchoStar issue an explanation that clearly shows what revenue streams and costs are going to the Dish-owned stock, and which are being brought into EchoStar. “Just basic algebra,” the investor said during the call. “Use arrows.”
What became clear during the call, and as the stock did not recover, was that Wall Street appeared to place a higher value on Hughes’ current retail satellite consumer broadband business than did EchoStar management.
EchoStar Chief Financial Officer David J. Rayner said that while the Hughes business is doing well — it added 53,000 net new subscribers in the three months ending Dec. 31, for a total of 860,000 — its costs as a retail business are many. Subscriber acquisition costs, churn management — all these will now be the responsibility of the tracking stock majority-owned by Dish.
One curious side effect of the transaction is that Dish’s principal satellite-television rival, DirecTV Group of Los Angeles, will now be in effect financing Dish each time DirecTV sells a Hughes subscription.
“DirecTV is a sales agent in our retail business,” Rayner said, meaning DirecTV-generated subscriber revenue will now go into a tracker stock — not publicly traded — owned by Dish.
DirecTV is also, as is Dish, a sales agent for Hughes’ satellite broadband competitor, ViaSat Inc. of Carlsbad, Calif.
On the other side of the transaction, Rayner said the $145 million in incremental revenue from the five satellites from Dish is probably an understatement. In addition, he said, the five satellites will double the current backlog at EchoStar Satellite Services, which has been struggling to achieve the scale its owners long planned for it.
With the higher revenue afforded by the five new satellites — they have an average life expectancy of nine years left in orbit, EchoStar said — the company has the financial room to grow. Dugan said EchoStar could be more creative than Dish in squeezing additional revenue from the transferred satellites.
EchoStar also insisted that the transaction involves only the U.S. satellite broadband retail business. Any satellite-broadband growth potential outside the United States is still the province of EchoStar.
Dugan said EchoStar’s most immediate growth prospect after its satellite-television deal in Brazil collapsed when its joint venture partner pulled out appears to be satellite-terrestrial mobile networks in Europe.
EchoStar recently purchased Solaris Mobile of Ireland from satellite fleet operators SES of Luxembourg and Eutelsat of Paris. The two European companies had given up trying to make a go of S-band satellite services after failing to strike deals with telecommunications operators to share in the ground investment needed for the business.
But Ergen has already invested in S-band satellite spectrum and related terrestrial rights by purchasing two bankrupt U.S. companies whose business plans were no more successful than SES’s and Eutelsat’s with Solaris.
As a result of these U.S. transactions, EchoStar has access, via Dish, to a large S-band satellite, called TerreStar-2, which is nearly built. Dugan said during the conference call that this satellite would be launched soon enough to satisfy European regulators, and that there could be synergies between the Dish/EchoStar assets in the United States and those in Europe.
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