EUR 442.45 For Business Accounts Only

Satellites RMT Helps to Refocus Parent on High-Growth Business

Back in 2008, Dish Network Corp. (DISH) was Spun off from Parent EchoStar Corp. (SATS). In that transaction, DISH became a standalone cable broadcasting business while SATS continued to operate the satellites used by DISH and other partners, as well as the high-growth Hughes satellite internet business. Now, over a decade later, DISH will regain direct control of its nine satellites in a Reverse Morris Trust, leaving SATS with two leasable satellites and the Hughes segment.

What's Happening?
DISH has been the major customer of SATS’ EchoStar Satellite Services segment, accounting for 85-90% of the segment’s revenue, and internally the portion of satellites servicing DISH are referred to as the BSS operations. However, this business arrangement was hampering the segment’s growth, as the revenues and EBITDA remained stagnant and subpar compared to competition because the satellites in the ESS Business were under long-term fixed price contracts. By comparison, the Hughes segment has outperformed every year with its revenues growing at a CAGR of +11% between 2016 and 2018 versus the -6.3% CAGR of the ESS segment for the same period.

Therefore, performing a tax-free distribution of the BSS operations and merging them into DISH makes strategic sense for SATS to focus on its high-growth Hughes business. Moreover, there is an additional cost angle to the story, as the RMT with DISH will help the latter to reduce costs and improve its free cash flows and EBITDA by bringing the satellites in-house, as DISH will now have complete control over its cost structures. The Spin-merger will be carried out through a tax-free distribution, wherein SATS shareholders will receive ~23m DISH shares (valued at ~$767m at the market price of $33.44) – a distribution ratio of 0.24 DISH shares per single SATS share owned.

The Edge View (SATS, Parent)...
Following the Spinoff of the BSS business, there will be very little left of the ESS business, namely two launched satellites and one soon to be launched, all of which are available to lease to partners for broadcasting purposes. We believe with the expected launch being on schedule for 2021, additional partnerships around the world (like with YAHSAT (Middle East) and BHARTI (India)) and a leaner balance sheet with net leverage of only 0.1x, SATS is well positioned to concentrate and grow its core profitable Hughes segment.

The Edge View (DISH, Spin-Merged Entity)...
DISH has recently seen its Pay-TV subscribers dwindle as it faces competition from online content providers and may see competition intensify as The Walt Disney Co. (DIS) prepares to enter the market later this year (November 2019). However, the company is taking measures to rein in costs with measures like the acquisition of the BSS business from SATS. Furthermore, the FCC recently approved the purchase of Spectrum from Sprint, marking DISH’s entry into the retail wireless space and joining the ranks of AT&T, Inc. (T) and Verizon Communications, Inc. (VZ). We believe this is an effective way to improve its cash flows, though this is a long-term play as DISH does not expect to hit even 70% coverage of the US population until 2023.