Revenge Is A Dish Best Served Cold

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Now that Dish Network (NASDAQ: DISH) CEO Charlie Ergen has lost out on both Sprint and Clearwire, everyone is wondering what his next move will be. Chances are he's following the adage of “revenge is a dish best served cold,” which means that he's calculating his next move. There's also the saying that “everything happens for a reason” and that a bigger and more exciting opportunity awaits Dish and its shareholders. One thing we know for sure is that Ergen isn't going to stop trying to make Dish Network an even bigger force in the media landscape.

The strategy

The strategy for Dish and other media companies is to interconnect people's lives. The goal is to spread entertainment beyond the living room and connect people wherever they are. People are increasingly doing more on their smartphones and continue to transition to a more cordless society. The strategy for Dish was to buy Sprint and use its spectrum so that mobile users can watch Dish Network on their mobile devices wherever they are. Companies such as AT&T, Verizon, Comcast and DirecTV (NASDAQ: DTV) are all looking to accomplish the same thing, and there's a race among these companies to see who can do this first.

The satellite industry

Just over ten years ago, Dish Network and DirecTV tried to merge, but the merger was rejected by the FCC. Today, the landscape is different than it was back then. Now content providers are in the driver's seat because of all the options to distribute their content. Content distributors like Dish and DirecTV have a disadvantage in negotiating fees for content. Content providers are asking and getting top-dollar for their programs.

The biggest fan of consolidation among cable and satellite providers is billionaire and cable TV pioneer John Malone. Malone has a vested interest since he owns 5% of DirecTV through Liberty Media. At this year's Allen & Co. conference, John Malone told Bloomberg:

It would be good if DirecTV could combine with Echo or Dish or whatever Charlie calls it now just because scale economics in the media business drives down costs and makes it possible for larger investment.

<table> <tbody> <tr> <td> </td> <td> <p><strong>Dish</strong></p> </td> <td> <p><strong>DirecTV</strong></p> </td> </tr> <tr> <td> <p><strong>Market Cap</strong></p> </td> <td> <p>$20.46 billion</p> </td> <td> <p>$34.63 billion</p> </td> </tr> <tr> <td> <p><strong>Employees</strong></p> </td> <td> <p>35,000</p> </td> <td> <p>27,200</p> </td> </tr> <tr> <td> <p><strong>Revenue</strong></p> </td> <td> <p>$14.24 billion</p> </td> <td> <p>$30.27 billion</p> </td> </tr> <tr> <td> <p><strong>Gross Margin</strong></p> </td> <td> <p>0.39</p> </td> <td> <p>0.48</p> </td> </tr> <tr> <td> <p><strong>EBITDA</strong></p> </td> <td> <p>$2.87 billion</p> </td> <td> <p>$7.41 billion</p> </td> </tr> <tr> <td> <p><strong>Operating Margin</strong></p> </td> <td> <p>0.13</p> </td> <td> <p>0.17</p> </td> </tr> <tr> <td> <p><strong>Net Income</strong></p> </td> <td> <p>$491.98 million</p> </td> <td> <p>$2.91 billion</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>41.48</p> </td> <td> <p>13.15</p> </td> </tr> <tr> <td> <p><strong>PEG Ratio</strong></p> </td> <td> <p>2.86</p> </td> <td> <p>0.62</p> </td> </tr> </tbody> </table>

A DirecTV/Dish combination would have 34 million subscribers. The cost savings would be tremendous, as its would eliminate overlapping ground facilities and staffing. Even though the landscape has changed since they tried to merge the first time, there's no guarantee the FCC would allow a merger to happen now.

Other options

Ergen's focus at Dish is on building a wireless broadband network. He has been amassing airwave spectrum rights, but has said that he needs additional licenses. His current plan is to acquire the assets of LightSquared out of bankruptcy. Dish has put forth a bid of $2.2 billion. There's still no guarantee that Dish will prevail or if another bidder will emerge.

The other option for Dish being talked about is buying T-Mobile US (NYSE: TMUS). T-Mobile is the fourth largest mobile carrier in the U.S. and has the spectrum Ergen is looking for. Hedge fund manager John Paulson became a T-Mobile shareholder after it bought MetroPCS, where he was a large shareholder. In his letter to clients, Paulson said

While the merger closed, we continue to hold the stock as we believe that T-Mobile remains a potential takeover target for either Dish or Sprint.

An acquisition of T-Mobile would not be cheap for Dish. It has a current market cap of $7.09 billion, and Dish would have to assume its $17.33 billion in debt. While less than what Dish was willing to pay for Sprint, it's still not cheap.

Perhaps a more manageable deal would be for Dish to acquire United States Cellular (NYSE: USM), the sixth-largest carrier in the U.S. It has a current market cap of $3.37 billion and only $879.07 million in debt. There's also $530.28 million in cash to offset the debt. However, any deal would require the approval of majority owner Telephone & Data Systems.

Foolish assessment

The next move for Dish and its CEO Charlie Ergen is going to be an interesting one. He has a reputation of winning, and I'm sure he's not happy about having Sprint and Clearwire snatched out from under him.

In my opinion the best deal for Dish would be a merger with DirecTV. The cost savings would pay for itself in no time. Whether or not Ergen is looking to go this route is anyone's guess. He is certainly playing his cards close to his vest, and we will all be waiting for his next move. Either way, the final decision will benefit Dish shareholders.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends DirecTV. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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