Moody's: "Long-term viability" of DBS rides on EchoStar-Hughes merger

By Paul A. Harris

St. Louis, Mo., Dec. 17 - With an apparent decline in the rate of growth in the pay TV industry, Moody's high yield media analyst Russell Solomon believes EchoStar Communications Corp.'s pending acquisition of Hughes Electronics Corp. could set the stage for genuine competition between cable and satellite TV.

"The concern is that the consolidated company, EchoStar and Hughes, is going to own basically all the orbital slots in the North American zone, which is a pretty powerful position," Solomon said. "But I think, overall, regulatory authorities are interested in getting a truly viable competitor to the incumbent cable TV industry. And in Moody's estimation this merger is the only way to accomplish that."

"There's too much scarcity of satellite capacity today and it's very expensive to grow that capacity at a meaningful level," Solomon added. "If you combine the two companies you can clearly have many operating synergies, the most obvious of which is that both companies won't have to program independently from different satellites.

"That will effectively free up arguably 50% of the capacity of the satellite fleet that's already deployed for other products, which would include more local signals into less-densely populated markets and the potential for two-way internet access at high speed to compete with the cable modem product, which we feel is critical for the long-term viability of the DBS industry."

EchoStar Communications is set to price $700 million senior notes due 2008 via joint bookrunners Deutsche Banc Alex. Brown and Credit Suisse First Boston on Wednesday or Thursday. It is anticipated that Moody's will assign a B1 rating to the new issuance, based on the existing unsecured ratings and the flexibility inherent in those ratings to do an offering of this size. The existing Standard & Poor's rating on EchoStar is B+.

Identifying cable as the "incumbent pay TV provider," Russ Solomon said cable currently claims a subscriber-base in the "low to medium 60% range" of the 100-105 million American TV households. Satellite TV, meanwhile, presently has 16-17 million subscribers.

Up until the mid-1990s, he added, cable was posting growth rates of 3-4% per year, in subscribers. That has fallen off more recently to about a 1% annual growth rate, Solomon said, adding that growth could be flat to negative over the next couple of years.

"We believe the pay TV industry is reaching a state of maturity," he said. "It will ultimately be more of a give and take between the competing service providers than an expansion of the pay TV pie, overall. It will reach 80%-85% penetration nationally which will probably be the mature peak level.

"To the extent that these companies want to continue growing, they're going to have to start taking subscribers back from one another."

The proposed merger would also better enable EchoStar to begin paring away at the current $3,000 cost of equipping a house for internet access via satellite - eventually down to the $300-$400 range.

Also, Solomon said, the merger would position EchoStar more favorably with regard to addressing the present scarcity in satellite capacity which, he added, it will need to overcome in order to achieve greater market penetration.

Pointing to failures on the part of GlobalStar, Iridium, and EchoStar satellites over the past two years, Solomon said that the cost of putting a satellite in orbit is on the way up, owing mostly to insurance costs.

The cost of a satellite, including launch and insurance, Solomon said, is approximately $250 million. Insurance, he added, represents 25%-30% of that total.

"Some companies - EchoStar is one - are effectively self-insuring their satellite fleets because the cost of the quotes that they are getting from the insurance company is very high."

Solomon said that although Moody's thinks the EchoStar-Hughes transaction should be approved, the fixed income community seems to be of the opinion that the odds on it happening are pretty long.

"Certainly there will be some concessions that will be required," Solomon said. "We don't think it will be approved in its current form, entirely. There will be some fairly minor concessions that will be made, and EchoStar will be able to live with that on a going-forward basis."

End

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.