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Could Dish buy TiVo? Part 2
Chris Forrester ©RapidTVNews | 11-04-2010
Two weeks ago, on March 28, we posed the question of whether Charlie Ergen’s EchoStar and Dish operations might buy TiVo, the pesky DVR business that’s given Ergen so many headaches, and could end up costing his business up to $4 million a month in penalty payments. Now it seems we are not alone in thinking this is a good idea.
MultiChannel News, a trade publication that we hold in much regard, had this to say about the concept, quoting the thoughts of Jason Bazinet, an analyst at Citigroup. "The more we think about it, the more the possibility exists to us that EchoStar and TiVo merge," Bazinet wrote in a research note on Thursday. "While [Wall] Street seems to be fixated on the risks to Dish Network, we think that's probably the wrong place to focus. In our view, TiVo belongs -- for many reasons -- at EchoStar, not Dish." Bazinet downgraded his rating on EchoStar from "buy" to "sell" -- lowering the price target on shares from $24 to $17.50 -- while he maintained a "buy" for Dish Network and raised his target price on that stock from $22 to $24. The two companies officially split in January 2008.
“In Friday morning trading,” said Multichannel’s Todd Spangler, “TiVo's stock was up more than 4%, to $18.15 per share, while EchoStar was down about 3.5%, to $19.96. Dish was up about 4%, to $21.90 per share. Dish Network and EchoStar have until April 30 to settle the six-year-old patent litigation with TiVo or the satellite operator faces the prospect of disabling upward of 8 million customer DVRs. Last month, the U.S. Court of Appeals for the Federal Circuit denied Dish's request to overturn a lower-court ruling finding the satellite operator in contempt of an order to disable DVRs that were found to infringe the TiVo patent, which covers a system for simultaneously recording and playing back TV programming.
Bazinet speculated that EchoStar would offer cash and stock to TiVo shareholders in a deal worth about $2.3 billion. That suggests EchoStar would need to come up with about $565 million in cash, which could come from Dish Network "prepaying" royalties for the TiVo patent, amounting to between $640 million and $1.625 billion, according to Bazinet's analysis. EchoStar would be interested in acquiring TiVo for four reasons, according to Bazinet: TiVo is likely to prevail in court; there are potential synergies between the two firms, particularly following EchoStar's acquisition of Sling Media in 2007; EchoStar was indemnified in 2009 from TiVo liabilities, which Bazinet sees as facilitating a merger between them; and EchoStar's effective control of TiVo's intellectual property would minimize risk to Dish by keeping the DVR technology out of the hands of competitors.
"[I]f TiVo is acquired to us it makes no sense for Dish to acquire the firm. EchoStar, after all, is the natural wholesale provider of services to the pay TV space," Bazinet wrote. "EchoStar sells boxes, they own Sling, they also sell transponder capacity. TiVo is a natural extension to this emerging wholesale, value-added role that EchoStar is trying to play in the global pay TV space."
Bazinet highlighted four points for this theory:
1) A legal victory for TiVo. Bazinet said if TiVo ultimately prevails in court, which is expected, Mr. Ergen has two choices: "pay the recurring royalties TiVo requests or acquire the firm." While many expected Dish (Nasdaq: DISH) would ultimately acquire TiVo, Ergen could use EchoStar's equity (and cash) to acquire TiVo. "Then, Mr. Ergen would – to a large extent – be paying TiVo royalties to himself," Bazinet says.
2) Potential synergies between the two firms. Citi sees synergies with EchoStar's Sling and Tivo.
3) EchoStar's 2Q09 indemnification from TiVo liabilities "we think, is that Mr. Ergen may have become more concerned that TiVo would win its legal case. And, if he contemplated acquiring TiVo on the heels of a TiVo legal victory, there would be two advantages from indemnifying EchoStar," Bazinet says.
4) De-risking of Dish's business by effectively "controlling" TiVo’s intellectual property. "By owning a large portion of TiVo, it keeps the asset out of the hands of other pay players that may want to ink an exclusive DVR contract with TiVo," Bazinet said.
Here’s Rapid’s original take on the dilemma. http://www.rapidtvnews.com/index.php/201003286218/could-dish-buy-tivo.html
© Rapid TV News 2010
