Report: DirecTV, Dish Team Up on Intelsat Bid

Wall Street Takes Note of Rivals Teaming Up on Clearwire Internet Product

By Linda Moss -- Multichannel News, 6/14/2007 9:58:00 AM

The country’s two largest direct-broadcast satellite providers appear to be more closely aligning by reportedly readying a joint bid for Intelsat and reaching broadband deals with cell-phone magnate Craig McCaw’s Clearwire.

On Thursday, DirecTV and EchoStar announced that they had distribution agreements to offer Clearwire’s wireless high-speed Internet service to their subscribers. That deal will provide all three companies a way to offer a bundle of video, voice and data services to their customers -- and better compete with cable.

Also Thursday, The Wall Street Journal reported that EchoStar and Liberty Media -- which is acquiring News Corp.’s stake in DirecTV -- were planning to participate in an auction with a joint offer for Intelsat, the world’s largest operator of commercial satellites.

AP first reported in April that Intelsat was on the auction block, and that the sale was prompted by an approach from the Blackstone Group. Bids are expected to be in the $4.5 billion-$5.5 billion range, according to The Journal.

Craig Moffett, a Sanford C. Bernstein media analyst, immediately issued a report saying that the two separate deals “suggest a cozier working relationship” between DirecTV and EchoStar as they look to team up to reduce their costs and gain a strategic advantage over cable.

“The deals are as interesting for what they say about current and future relations between the two DBS operators as they are for their own merits,” Moffett wrote. “While the two companies have long talked of a joint wireless venture, the announcement of the Clearwire deal marks a new milestone in the alignment of their interests. And the joint participation of Liberty and EchoStar in the Intelsat bid clearly indicates that those two companies are working together on at least one front -- a sign that further cooperation is possible after Liberty takes control of DirecTV later this year or early next.”

Officials at Intelsat, Liberty and EchoStar declined to comment Thursday. But Moffett thought the Clearwire deal was especially significant. 

“First, it fills a long-standing need for a broadband solution for the two companies,” he wrote. “As we have written frequently in the past, broadband is taking a position at the center of the customer purchase decision for the bundle, and the DBS lack of a broadband partner has become increasingly glaring.”

In addition, according to Moffett, the Clearwire deal “significantly reduces -- even if it certainly doesn't eliminate -- the risk of a costly participation in the upcoming 700-megahertz spectrum auction (and consequent costly build-out of a wireless network of their own).”  

But Spencer Wang, a Bear Stearns analyst, was not very bullish on the potential benefits of the potential Intelsat deal to DirecTV and EchoStar.

“The [Journal] article argues that the strategic rationale is to reduce operating costs,” Wang wrote. “However, our initial take is that cost savings are fairly limited as Intelsat's U.S. assets are primarily C-band assets, not Ku -- the band DBS primarily uses to broadcast video services.”

Wang added, “Other benefits theoretically include revenue diversification away from an increasingly competitive consumer video business and the high cash-flow generation of Intelsat. The growth of bandwidth-intensive HD programming and IPTV [Internet-protocol TV] could spur more demand for Intelsat’s FSS [fixed satellite services] capacity. Fiber-optic transmission of HD signals, however, is an alternative and worrisome for owners of satellite capacity.”

Both Moffett and Wang said Thursday’s news was likely to renew speculation that DirecTV and EchoStar will eventually merge, but both analysts believe federal regulators won’t approve such a deal.