DIRECTV/DISH: A debt-fueled satellite combination

More than two decades since DIRECTV Entertainment Holdings LLC and DISH Network Corp. first tried to merge, the companies are back with a new proposal that underscores the falling fortunes of the legacy video market.

DIRECTV said Sept. 30 that it will buy EchoStar Corp.'s video distribution business, including DISH TV and Sling TV, for $1. The deal comes 22 years after the US Department of Justice blocked DIRECTV and DISH's first attempted merger in 2002 due to anticompetitive concerns. Market rumors of a potential deal have followed the two satellite TV operators ever since, with DISH co-founder and EchoStar Chairman Charlie Ergen calling the DISH/DIRECTV marriage "inevitable."

Under the terms of the new deal, DIRECTV will also take on DISH DBS' debt load, which stands at about $11.75 billion. In a separate but simultaneous deal, AT&T Inc. is selling its 70% stake in DIRECTV to TPG Inc., the alternative asset manager that already holds the remaining 30% stake. AT&T expects to receive about $7.6 billion in cash payments from DIRECTV over the term of the deal.

To support DISH DBS' debt, TPG's credit and real estate investing platform TPG Angelo Gordon and co-investors including DIRECTV provided $2.5 billion to fully refinance DISH's November 2024 debt maturity. The companies have also begun working on exchange offers for various DISH DBS notes with a total face value of about $9.75 billion. Notably, the new notes would require a reduction of over $1.5 billion in the principal value of DISH DBS' debt.

Much has changed since DIRECTV and DISH's last merger attempt. In 2002, the combination would have created a large competitor in a relatively concentrated marketplace where many households could only choose between cable and satellite video, effectively reducing consumers' pay TV provider choices from three to two.

Today, the video marketplace looks very different. In addition to cable and streaming, now there are virtual multichannel service providers, including DISH's own SLING TV and Google LLC's YouTube TV. Subscriber totals for eight streaming services — including Amazon.com Inc.'s Prime Video, Netflix Inc., Comcast Corp.'s Peacock and Walt Disney Co.'s Hulu and Disney+ — would beat that of a combined DIRECTV/DISH pay TV service in 2024.

"There is more competition than ever before," DIRECTV CEO Bill Morrow said on a Sept. 30 call with analysts. "You can see where consumers have a whole lot of choice to be able to satisfy their video interests."

While Morrow acknowledged that streaming is dependent on broadband availability, the CEO also noted that broadband deployment has "advanced significantly" over the past 5 to 10 years.

"This enables people to have choice beyond satellite TV, beyond cable TV," Morrow said.

As evidence of this increased choice, Morrow pointed to the video subscriber declines at both DISH and DIRECTV. Together, the companies have lost 63% of their satellite subscribers since 2016.

Notably, in recent quarters, DISH has seen declines in its traditional satellite video roster and also in its SLING TV business.

Given the current video marketplace, analysts seem sanguine that regulators will approve the combination. Pointing to "the dispiriting backdrop for satellite TV overall," as well as regulatory interest in making EchoStar viable as a fourth national player in the US mobile market, MoffettNathanson analyst Craig Moffett said it is "hard for us to imagine that regulators would stand in the way of a merger — one satellite operator is better than none."

DIRECTV's Morrow said the combined company will be different than most other video platforms operating today. Unlike cable video providers that generate the bulk of their margins from broadband, or streaming platforms operated by diversified media conglomerates, the combined satellite entity would have only its video business and thus be highly motivated to focus on video innovation.

"We don't have other products to sell. This is our sole livelihood," Morrow said.

DIRECTV said it expects to close the deal by the end of 2025.