Yesterday, DISH Network Corp. (DISH), the second largest satellite-TV operator in the U.S., won the auction for the currently bankrupt movie and video game retailer Blockbuster Inc. DISH Network will pay $320.6 million. However, the company estimated that after adjusting available cash and inventory of Blockbuster, DISH Network needs to pay approximately $228 million. The deal is expected to be closed by mid-2011.
Possible Synergies:
(1) Blockbuster is a strong brand name and has 1,700 stores. In September 2010, the company had 1.3 million subscribers when it filed for bankruptcy. DISH Network can now utilize those stores to sell more subscription. The company can also start shipping DVDs to its existing subscribers.
(2) Blockbuster has a robust video on demand service. Blockbuster videos can be downloaded on mobile phones, computers, game consoles, and blue-ray players. DISH Network can complement this with its own TVEverywhere services available on TV and DVRs. Furthermore, acquisition of Blockbuster will provide DISH Network adequate bargaining power with movie studios.
(3) The acquisition will provide DISH Network the rights that Blockbuster currently enjoys to stream movies over the Internet. In this respect, DISH Network may become a viable competitor to online video streaming companies such as Netflix Inc. (NFLX), Hulu, and uTube.
(4) We believe, for the last couple of months, management is trying hard to develop DISH Network for the storage of spectrums that can be used to grow a viable pay-TV distribution network. In the previous month, DISH Network purchased bankrupt DBSB North America for $1.4 billion. This acquisition will provide DISH Network the extremely valuable spectrum of DBSD for both wireless and wireline communications. Additionally, DISH Network itself owns a slot of highly demanded 700 MHz wireless frequency. Using these slots of airwaves, the company can form a very formidable video-on-demand service over a wireless network of mobile handsets such as smartphones and tablets.
Possible Negatives:
(1) Blockbuster is at present under bankruptcy. For the financial year ended October 3, 2010, total revenue of Blockbuster declined by a massive 17% year over year to $3.5 billion and its free cash flow becomes almost zero. Failure to properly integrate the new company may result in severe cash drain from DISH Network.
(2) DISH Network needs to thoroughly revamp Blockbuster that include renew of studio deals, securing streaming rights for a large number of movies, and to install an efficient infrastructure and delivery mechanism to compete with other online video streaming companies.
(3) So far, DISHNetwork positioned itself as a low price leader in the U.S. pay-TV industry by subsidizing the cost of equipment and installation for increasing the subscriber base. However, its recent moves are shifting toward more wealthy customers, who are expected to pay more for watcing TV and are less likely to cancel subscription. The company also raised monthly fees and discontinued aggressive discount and promotions. However, it resulted in huge subscriber loss. During the fourth quarter of 2010, DISH Network lost around 156,000 net subscribers whereas its closest competitor DIRECTV (DTV) added 289,000 net subscribers.
Our Recommendation
In the U.S., the pay-TV market is highly competitive. We believe targeting low-end customers did not generate the required momentum for the company. The U.S. economy is improving and as a result, customers are more inclined to pay for premium services. However, it requires a strong content portfolio, innovative delivery system and effective marketing strategy to capitalize on these opportunities. In this respect, we believe DISH Network will definitely benefit from Blockbuster acquisition.We maintain our long-term Neutral recommendation on DISH Network. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.
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