Does Ma Bell want a DISH?
There are rumors that AT&T may bid for EchoStar. Speculation seems premature but a deal makes sense.
NEW YORK (CNNMoney.com) – Cable companies and telecoms are at each other's throats.
Cablers Comcast (Research) and Cox are trying to steal customers from the Baby Bells by offering Internet phone services while the major telecoms, most notably Verizon (Research), are investing in new technology to offer digital video services over phone lines.
So how will this battle for customers ultimately pan out? Some analysts say it wouldn't be a surprise if more merger activity shakes up the world of cable and telecom.
Rumors have made the rounds lately that AT&T (Research) (formerly known as SBC) may be interested in acquiring EchoStar (Research), the nation's second largest satellite TV firm. Shares of EchoStar have gained more than 11 percent since mid-November.
Spokespeople for the two companies would not comment on the speculation. But some analysts say a deal makes sense.
In addition, AT&T and EchoStar are already partners. In 2004, SBC and EchoStar launched a co-branded satellite TV service for SBC customers called the SBC/DISH Network.
But this joint venture might not be enough to make AT&T a serious player in video.
Why a deal makes sense
Rob Sanderson, an analyst with American Technology Research, said an AT&T/EchoStar combination has been a subject of rumors for some time because it could be easier (and cheaper) for AT&T to buy its way into the video market rather than building a costly fiber-optic network.
AT&T and Verizon are spending heavily on fiber-optic networks. But building a network is a big risk that doesn't guarantee customers. EchoStar, on the other hand, already has infrastructure in place to offer video nationwide and has nearly 12 million customers to boot.
"Verizon's strategy is ridiculously capital intensive," Sanderson said. "And it's not just the cost. It's the return on the investment. Right now, EchoStar has a strong business that provides a lot of cash flow and it is putting that cash back into growth."
Also pointing to deals to come is that cable companies have a big head start in the rush to offer new services. They are already heavily promoting phone services to customers through a technology known as voice over Internet protocol (VoIP). And many are partnering with Sprint Nextel to offer wireless services.
That puts cablers in the lead to offer the so-called "quadruple play" of phone, video, data and wireless services. "When you have four products in the house it's going to be tough to get consumers to switch. If AT&T bought EchoStar, it's a good way to get customers that are not already signed up with cable," said Greg Gorbatenko, an analyst with Jackson Securities.
Finally, time is short. It will take a while for phone companies to complete the rollout of their fiber-to-the-home networks and some think AT&T can ill afford to sit back and watch cable companies take away customers without having a viable option of its own to offer.
"A move towards EchoStar would give AT&T a stronger presence in the video market and if the goal is to hurt cable, the fastest way to do that is through satellite," said Allan Tumolillo, principal of Transformation Research and Consulting, an independent research firm.
But can AT&T afford another big purchase?
Still, some think talk of a merger is a bit premature. Thomas Eagan, an analyst with Oppenheimer & Co., said he doesn't think a deal is likely anytime soon.
Instead, he thinks AT&T may take a wait-and-see approach.
"It's a little early," said Eagan. "EchoStar becomes a candidate for a buyout should cable VoIP efforts succeed and if the phone companies' IP video services do not work."
Joseph Bonner, an analyst with Argus Research, adds that AT&T has already committed a lot of money to its fiber-to-the-home initiative. With that in mind, he thinks AT&T would be better off just continuing its partnership with EchoStar instead of purchasing it outright.
"Why would AT&T want to buy EchoStar when they already have the alliance now?" he said. "Strategically, I don't see motivation for doing it. The company is too far along on its own rollout."
There's also the issue of whether or not AT&T should be taking on another deal so soon. The SBC/AT&T merger just closed in December.
Plus, SBC's Cingular Wireless unit is still in the process of integrating AT&T Wireless, which Cingular bought in 2004 for $41 billion.
EchoStar wouldn't come cheaply either. The company currently has a market value of about $12.1 billion. So it would seem likely that in a takeover, AT&T would probably have to pony up at least $15 billion to get a deal done.
There's also nearly $6 billion in EchoStar debt that AT&T would have to assume, a considerable amount to add to Ma Bell's current debt burden of about $23.2 billion.
That would be a lot for AT&T to handle at one time, Gorbatenko said. He added that even though cable is a significant threat, the company's priority should be on finding ways to better compete against its biggest telecom rival, Verizon.
"The main criticism of AT&T/SBC has been that they bite off more than they can chew. The company needs to fix up Cingular so it can go more toe to toe with Verizon," Gorbatenko said.
That said, Bonner thinks you can never rule out a deal as long as AT&T chairman and chief executive officer Edward Whitacre, who was the CEO of SBC, is at the helm.
"The old SBC never met an acquisition target that it didn't like," he said.
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