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The Future of Dmitriy Gorenshteyn Daniel M. Choi Brandon Stackhouse Levi Golston & Ellen Zhang.

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Presentation on theme: "The Future of Dmitriy Gorenshteyn Daniel M. Choi Brandon Stackhouse Levi Golston & Ellen Zhang."— Presentation transcript:

1 The Future of Dmitriy Gorenshteyn Daniel M. Choi Brandon Stackhouse Levi Golston & Ellen Zhang

2 Positioning for the future Decision Merge with DirecTV Stock-swap to minimize financial risk Implementation Consolidate operations to reduce costs Leverage market share Diversify offers to subscribers Next Steps Accelerate entry into wireless market Expand beyond US Due to Competitor consolidation Mature and evolving market Increasing supplier pressure

3 Pay-TV market is saturated in the U.S. Source: Bloomberg Decision Implementation Next Steps Subscriber growth has dwindled Market share tied up between 4 companies Rate of TV US household on the decline

4 Programming costs expected to increase Source: Bloomberg, SNL Kagan Decision Implementation Next Steps Retransmission fees projected to continue rising Content providers will continue to drive costs up for the Pay-TV market

5 DirecTV merger necessary for competition Source: Bloomberg, SNL Kagan Decision Implementation Next Steps Larger customer base provides more leverage for TWC-Comcast Leverage opportunity realized for cable by curbing the rising costs of content Rising costs for satellite companies

6 Satellite merger projected to realize savings Source: Bloomberg, SNL Kagan Decision Implementation Next Steps Comparable customer base between cable and satellite Programming costs for DISH-DirecTV merger under control

7 Reduction in costs by 2018: 10% subscriber acquisition costs 10-15% SG&A 10-25% programming costs Strong synergy: +$3.8B Conservative:+$2.0B Net income projected to grow post-merger Source: 10-K Filings, S&P Decision Implementation Next Steps *assuming flat customer growth

8 Core Competencies & Merger Synergies Decision Implementation Next Steps Major DBS players in the US market DVR (Hopper and Genie) Streaming, On demand HD Spectrum holdings Satellite Internet Rural area coverage Latin America market Exclusive channel packages Combined cutting- edge technology More channels & cheaper packages Better geographic coverage

9 Structure of the deal Source: S&P Decision Implementation Next Steps AcquireStock Swap Highly leveraged financial risk: Requires $45-50 B debt financing and assumption of DTV debt FFO/debt ratio ~12% Difficult to repay debt obligations High taxation of acquisition Intermediate financial risk: Stock swap at 1.32 DISH: 1 DTV Pro forma value of $66.5 B FFO/debt ratio ~27% Healthy ratio to repay debt obligations Lower taxation of acquisition

10 Merge via stock-swap Source: S&P Decision Implementation Next Steps AcquireStock Swap Highly leveraged financial risk: Requires $45-50 B debt financing and assumption of DTV debt FFO/debt ratio ~12% Difficult to repay debt obligations High taxation of acquisition Intermediate financial risk: Stock swap at 1.32 DISH: 1 DTV Pro forma value of $66.5 B FFO/debt ratio ~27% Healthy ratio to repay debt obligations Lower taxation of acquisition

11 Rapid growth in Latin American digital TV market DirecTV estimated 33% market share Latin American DBS market is expanding Source: 10-K filings, Digital TV Research Decision Implementation Next Steps Latin American Market

12 New opportunity: Global wireless broadband Source: Broadband Commission for Digital Development, ExtremeTech Decision Implementation Next Steps Broadband Commission for Digital Development Acquisitions of TerreStar, DBSD North America, and others: Unpaired 700 MHz: multipoint broadcasting w/ eMBMS PCS H block: LTE wireless country-wide AWS-4 blocks: additional broadband capacity Mobile Broadband is GrowingDishs Spectrum Holdings

13 Now is the right time to shift to wireless market Source: Bloomberg, Decision Implementation Next Steps Industry Pay-TV competitors are also in broadband Internet market Over-the-top content delivery expanded by 225% in past 4 years Dish Network is in process of acquiring additional wireless spectrum licenses Regulatory Environment FCC is currently reallocating wireless spectrum FCCs National Broadband Plan actively promotes broadband penetration Dept. of Justice is reconsidering competition standards in face of broadband development

14 Future growth strategies Source: Advanced TV Decision Implementation Next Steps Future Build-outs Latin America (DirecTV) Wireless broadband Smart home potential (DirecTV: LifeShield) Electronic sell-through (EST) Mobile & Interactive TV (ex. DirecTV – shares in i.TV) 4K resolution and beyond – potential for a specialty market

15 Short-Term (0-2 yrs) Mid-Term (3-5 yrs) Long-Term (5+ yrs) Survive Merge with DirecTV Consolidate operations Lower costs Position Build core-competencies Roll out wireless broadband Expand Latin American market Thrive Identify new opportunity Expand global market High Risk Not a diversified business Volatile Risk Changing structures Robust Business Diversified business robust to disruption DBS Diversified Content Provider

16 1.Mobile satellite TV market to reach $11bn by 2015, in Advanced Television 2.IBISWorld Industry Report 51711a 3.IBISWorld Industry Report 51711b 4.Yahoo! Finance 5.What Would A DIRECTV-DISH Merger Mean For Ratings?, S&P Credit FAQ, Oct Dish secures spectrum for 150 Mbps LTE wireless broadband to rural homes in the US, Neal Gompa in Extreme Tech 7.Ergen lays out Dish Networks 10-year plan, Associated Press, May Updated Industry Retransmission Fee Projections, SNL Kagan, November Multichannel Video Subscription Count Drops by a Quarter Million in 2013, SNL Kagan, March US Multichannel Subscriber Update and Programming Cost Analysis, SNL Kagan, June 2013 Sources

17 11.Analysis: In telecom merger mania, skeptical eye from Obama administration, by Alina Selyukh and Sinead Carew in Reuters, Dec DirecTVs Latin America Pay-TV Is Booming, by Trefis in Forbes, Sep Saturated market for DBS, in Advanced Television, Nov What A Merger of Comcast And Time Warner Cable Could Mean For Hollywood, by David Lieberman, Feb Economics of Mobile Programming, SNL Kagan, Mar Why A DirecTV Dish Network Merger Might Be Different This Time Around, Forbes, Mar Ergens DirecTV Overture Puts Dish in Play: Real M&A, Bloomberg News, Mar FCC Chair Hints at Spectrum-Allocation Idea, Wall Street Journal Tech, Dec Dish-DirecTV M&A May Yield Up To 25% Programming Cost Savings, Bloomberg, Mar Dish-DirecTV DOJ Review Would Have Three Possible Outcomes, Bloomberg, Mar Broadband, Commercial Service Are Main Bull Cases for U.S. Cable, Bloomberg, Mar Sources -continued

18 Appendix

19 Service Segments Source: IBISWorldSupplement Cable $ 84.9 bn Satellite $39.9 bn

20 Financial Summary (EOY 2013) DISHDirecTV Liquidity (current ratio) Operating margin (EBIT% / revenue)12.8%16.7% Asset turnover (revenue / avg assets) Interest burden (pre-tax profit / EBIT%)63.7%84.4% Revenue$13.9 bn$31.8 bn Sales growth5.49%6.77% P/E ratio Profit

21 Projected cost reduction schedule Cost Reduction Schedule OPTIONS Programming % SG&A % Subscriber Churn %

22 DISH Projections DirecTV Projections Cost Calculation Programming per user SG&A Op. expense Programming per user SG&A Op. expense

23 DISH Projections DirecTV Projections Net Income Calculation Subscriber Adds SAC Revenue SAC Revenue Subscriber Adds

24 Projected cost efficiencies post-merger Source: 10-K Filings, S&P Decision Implementation Next Steps

25 Exchange Ratio Calculation Supplement Basis date2/28/2014 Stock price DISH$58.84 Stock price DTV$77.60 Shares outstanding DISH458.34M Shares outstanding DTV509.47M Stock exchange ratio1.319 Pro forma shares1,130.24M Pro forma value$66.5 bn

26 White: % of household with TV Orange: Over-the-top subscribers (000s) Over-the-top subscribers Source: Bloomberg

27 Triple Play isnt a good idea (i.e. no landline) Supplement

28 Current wireless strategy is poorly defined Looming FCC build-out requirements % % $10-26B in broadband transmission spectrum DISH attempted to acquire: SprintNextel (2013, failed) Clearwire (2013, failed) LightSquared (2014, GPS conflict) Pending FCC relaxing restrictions on currently owned spectrum Lack of industry experience or partner in venture

29 New market: Global wireless broadband Source: Bloomberg, Broadband Commission for Digital Development Decision Implementation Next Steps Broadband Commission for Digital Development Fees increase by 100%, 3% growth in market size

30 Vision laid out by Ergen (2012) for TV, voice, and internet to both home and mobile Acquisitions of TerreStar, DBSD North America, and others make it possible now Unpaired 700 MHz: point to multipoint broadcasting w/ eMBMS PCS H block: LTE wireless country-wide AWS-4 blocks: additional broadband capacity Use additional resources from merger to aggressively develop mobile capabilities Become the first to offer the new triple play - seamless wireless and satellite connectivity - anywhere in the U.S. DISHs Spectrum Portfolio Source: Extreme Tech Decision Implementation Next Steps

31 High Market Share Locations

32 Friendlier regulatory environment Source: FCC (2002) CS Docket No Supplemental FCC Findings DBS Market DBS growth flat over past 5 years DBS monopoly still a concern Pay-TV Market Pay-TV stagnant market Competitors are shifting to broadband Wireless Spectrum FCC National Broadband Plan Possible spectrum divestments necessary

33 FCC findings contingent on 3 arguments: 1.DBS Market 2.Pay-TV Market 3.Broadband Beyond 2002 Failed Merger Source: FCC, CS Docket No

34 Beyond 2002 Failed Merger -- DBS FindingsResponse Merger means consolidation to roughly 100% DBS market Fair point Issue because while benefits exist for expanding broadband market, DBS is still a viable market No longer true: DBS and Pay-TV overall is a saturated and shrinking market

35 Beyond 2002 Failed Merger -- Pay-TV FindingsResponse Pay-TV market would drop from 3 competitors to 2 Pay-TV is a stagnant market, whereas broadband is the substitute market Cable growth is flat, compared to 20% annual growth in DBS (2002) No longer true: DBS growth rates have been flat for past 3 years ( )

36 Beyond 2002 Failed Merger -- Broadband FindingsResponse Companies failed to uphold benefit to broadband competition Proposed model concurrent with FCCs National Broadband Plan (2013) Merger places all of the available full- CONUS DBS spectrum licenses in the hands of one entity Possible divestments necessary

37 Merger Payoffs ConsumerCompetition Pay-TV0 Wireless Services+1 Market Shift Barrier to Entry

38 Alternative merger prospects Decision Implementation Next Steps FCC may see merger as anti-competitive behavior Dish identity diluted AT&T and Sprint have more diversified holdings Does not lead to DBS monopoly Strong long-term market prospects with well- established companies Long-term growth prospects unclear Dish subsidiary may be barred from additional spectrum acquisitions

39 Things that could preclude the DISH-DirecTV merger Regulation* Ownership Cultural hurdles Technical barrier Merger Challenges Decision Implementation Next Steps

40 Market shift from Pay-TV to Online Content Regulatory Overhaul (National Broadband Plan) Promoting Broadband Penetration Spectrum Reallocation Re-visiting Competition Standards Friendlier Regulatory Environment

41 FCC Overhauling Broadband Regulation: Spectrum Reallocation Actively Promote Penetration DOJ Reconsidering Competitivity Standards Possibly Re-Visiting Communications Act National Broadband Plan (2013) Source: FCC,

42 AT&T or Sprint Merger? Short-TermLong-Term Opportunities AT&T and Sprint have more diversified holdings Does not lead to DBS monopoly (regulatory hurdle) Strong long-term market prospects with well- established companies Challenges FCC may see this as anti- competitive if WB via satellite is introduced (PrimeStar) Company identity diluted Long-term growth prospects unclear Dish subsidiary may be barred from additional spectrum acquisitions


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