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The Future of Dmitriy Gorenshteyn Daniel M. Choi Brandon Stackhouse

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Presentation on theme: "The Future of Dmitriy Gorenshteyn Daniel M. Choi Brandon Stackhouse"— Presentation transcript:

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

2 Positioning for the future
Due to Competitor consolidation Mature and evolving market Increasing supplier pressure 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

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

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

5 DirecTV merger necessary for competition
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 Decision ➡ Implementation ➡ Next Steps Source: Bloomberg, SNL Kagan

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

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

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

9 Decision ➡ Implementation ➡ Next Steps Source: S&P
Structure of the deal Acquire Stock 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 Decision ➡ Implementation ➡ Next Steps Source: S&P

10 Decision ➡ Implementation ➡ Next Steps Source: S&P
Merge via stock-swap Acquire Stock 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 Decision ➡ Implementation ➡ Next Steps Source: S&P

11 Latin American DBS market is expanding
Latin American Market Rapid growth in Latin American digital TV market DirecTV estimated 33% market share 2013 2018 Households (M) 66 134 Decision ➡ Implementation ➡ Next Steps Source: 10-K filings, Digital TV Research

12 New opportunity: Global wireless broadband
Mobile Broadband is Growing Dish’s Spectrum Holdings 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 Broadband Commission for Digital Development Decision ➡ Implementation ➡ Next Steps Source: Broadband Commission for Digital Development, ExtremeTech

13 Now is the right time to shift to wireless market
Industry Regulatory Environment 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 FCC is currently reallocating wireless spectrum FCC’s National Broadband Plan actively promotes broadband penetration Dept. of Justice is reconsidering competition standards in face of broadband development Decision ➡ Implementation ➡ Next Steps Source: Bloomberg,

14 Future growth strategies
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 Decision ➡ Implementation ➡ Next Steps Source: Advanced TV

15 Diversified Content Provider
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 Sources Mobile satellite TV market to reach $11bn by 2015, in Advanced Television IBISWorld Industry Report 51711a IBISWorld Industry Report 51711b Yahoo! Finance What Would A DIRECTV-DISH Merger Mean For Ratings?, S&P Credit FAQ, Oct. 2013 Dish secures spectrum for 150 Mbps LTE wireless broadband to rural homes in the US, Neal Gompa in Extreme Tech Ergen lays out Dish Network’s 10-year plan, Associated Press, May 2012 Updated Industry Retransmission Fee Projections, SNL Kagan, November 2013 Multichannel Video Subscription Count Drops by a Quarter Million in 2013, SNL Kagan, March 2014 US Multichannel Subscriber Update and Programming Cost Analysis, SNL Kagan, June 2013

17 Sources -continued Analysis: In telecom merger mania, skeptical eye from Obama administration, by Alina Selyukh and Sinead Carew in Reuters, Dec. 2013 DirecTV’s Latin America Pay-TV Is Booming, by Trefis in Forbes, Sep. 2013 Saturated market for DBS, in Advanced Television, Nov. 2013 What A Merger of Comcast And Time Warner Cable Could Mean For Hollywood, by David Lieberman, Feb. 2014 Economics of Mobile Programming, SNL Kagan, Mar. 2014 Why A DirecTV Dish Network Merger Might Be Different This Time Around, Forbes, Mar. 2014 Ergen’s DirecTV Overture Puts Dish in Play: Real M&A, Bloomberg News, Mar. 2014 FCC Chair Hints at Spectrum-Allocation Idea, Wall Street Journal Tech, Dec. 2013 Dish-DirecTV M&A May Yield Up To 25% Programming Cost Savings, Bloomberg, Mar. 2014 Dish-DirecTV DOJ Review Would Have Three Possible Outcomes, Bloomberg, Mar. 2014 Broadband, Commercial Service Are Main Bull Cases for U.S. Cable, Bloomberg, Mar. 2014

18 Appendix

19 Supplement Source: IBISWorld
Service Segments Satellite $39.9 bn Cable $ 84.9 bn Supplement Source: IBISWorld

20 Financial Summary (EOY 2013)
DISH DirecTV Liquidity (current ratio) 2.71 0.912 Operating margin (EBIT% / revenue) 12.8% 16.7% Asset turnover (revenue / avg assets) 0.737 1.50 Interest burden (pre-tax profit / EBIT%) 63.7% 84.4% Revenue $13.9 bn $31.8 bn Sales growth 5.49% 6.77% P/E ratio 15.1 36.5 Profit 807.5 2859

21 Projected cost reduction schedule
2014 2015 2016 2017 2018 OPTIONS Programming 0.02 0.05 0.08 0.1 10.00% SG&A 0.03 0.12 0.15 15.00% Subscriber Churn

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

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

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

25 Exchange Ratio Calculation
Basis date 2/28/2014 Stock price DISH $58.84 Stock price DTV $77.60 Shares outstanding DISH 458.34M Shares outstanding DTV 509.47M Stock exchange ratio 1.319 Pro forma shares 1,130.24M Pro forma value $66.5 bn Basis date: prior to announcement date Supplement

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

27 Triple Play isn’t a good idea (i.e. no landline)
Supplement

28 Current wireless strategy is poorly defined
$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 Looming FCC build-out requirements % % FCC restrictions: on currently owned spectrum to assist in mobile data streaming / LTE

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

30 DISH’s Spectrum Portfolio
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. eMBMS = Evolved Multimedia Broadcast Multicast Service -> very high spectral efficiency Decision ➡ Implementation ➡ Next Steps Source: Extreme Tech

31 High Market Share Locations

32 Friendlier regulatory environment
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 Supplemental Source: FCC (2002) CS Docket No

33 Source: FCC, CS Docket No. 01-348
Beyond 2002 Failed Merger FCC findings contingent on 3 arguments: DBS Market Pay-TV Market Broadband Source: FCC, CS Docket No

34 Beyond 2002 Failed Merger -- DBS
Findings Response 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
Findings Response 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
Findings Response Companies failed to uphold benefit to broadband competition Proposed model concurrent with FCC’s 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 Consumer Competition Pay-TV -1 Wireless Services +1
-1 Wireless Services +1 Barrier to Entry Market Shift

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

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

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

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

42 AT&T or Sprint Merger? Short-Term Long-Term Opportunities Challenges
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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